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FICA Tip Credit: Serving Up Savings

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Owning a restaurant seems like a glamorous idea, or at least it did to me, but there’s more to running a restaurant than cooking good food and mingling with customers. In order to be a successful restaurateur you have to have a good grasp on the fundamentals on running your establishment. You have to meet customer demands, maintain inventory as well as staff and manage expenses. Ensuring that expenses are recorded properly and issued appropriately might be one of the most daunting tasks, especially with the ever-changing regulations under the Federal Insurance Contributions Act (FICA). Going into 2014, new modifications have been prompted yet again and should be noted.

By law employers must pay taxes on these tips earned, as they are seen as income. Fortunately, there is a loophole known as a tax credit that allows restaurant owners to recover most of the money taken from tips. Those that choose to leverage this credit have the opportunity to save significant amounts of money.

What is FICA Tip Credit?

Food and beverage establishments accustomed to tipping, are entitled to a 45(B) credit for part of the taxes paid on tips earned by employees. An amount of 7.65% can be taken as a business credit on your corporate tax return.

What’s Changed?

According to the Revenue Ruling for 2012-18, service charges can no longer be included in the FICA  Tip Credit Report. Rather, service charges are determined as wages not tips and must be filed differently. The IRS guidance issued four criteria for determining whether amounts paid by patrons should be regarded as service charges or tips.

Criteria to be considered a tip:

  • The payment must be made free from compulsion.
  • The customer must have the unrestricted right to determine the amount.
  • The payment should not by the subject of negotiation or dictated by the employer.
  • The customer has the right to determine who receives the payment.

It is important to note that tip pooling, tip sharing and gratuities are no longer applicable for the FICA Tip Credit and are subject to taxes.

Benefits of Applying

Aside from the tax credits scarce identity among restaurant owners, it must be formally requested, which may also indicate why many are not taking advantage of it. However, owners using FICA tip credit potentially save hundreds for every employee that correctly reports their tip earnings. If you consider all servers and staff, the savings are substantial. Eligible applicants, it would behoove you to familiarize yourself with FICA tip credit and determine the best plan for your business. With regards to eligibility, there are two established criteria for the FICA tax credit:

  • Businesses have employees who were given tips for providing, delivering and serving food or beverage for consumption.
  • Businesses paid or those that incurred employer social security and Medicare taxes on these tips.

How to Calculate a FICA Tip Credit

On average a server makes $2.13 an hour plus tips. With FICA tip credit, a server makes $5.15 an hour (based on the old minimum wage). After tips, a server ends up making roughly 11 dollars. With FICA, the employer pays taxes on the 11 dollars earned, but is entitled to credit at the end of the year on the difference between minimum wage and the actual amount earned by the employee.

Take for example, Billy. Billy worked 40 hours a week making $2.13 an hour. Billy reported $300 in tips for the entire week. The Federal wage rate is $5.15 an hour for the purpose of FICA tip credit. In this case, a restaurant owner would save over $713.44 annually for this one employee. Here’s how it looks all spelled out.

Weekly Wages = Hours Worked X Hourly Rate + Reported tips

40 x $2.13 + $300 = $385.20

Wages Paid at Minimum Wage = Hours Worked x Federal Wage Rate

40 x $5.15 = $206.00

Tax Credit = Weekly Wages – Wages Paid at Minimum Wage x FICA

$385.20 – $206.00 x 7.65% = $13.72

Annual Savings per Employee = Tax Credit x Payroll Frequency

$13.72 x 52 weeks = $713.44 annually

The Paycom Solution

The savings allotted to restaurant owners from FICA are significant but the process in which to keep track with expenses can be a mess. However, Paycom can help by automatically producing a FICA Tip Credit Report that can be generated every pay period. No more hassle and confusion, everything is done for you. And with the ease of a single application and capability to alleviate compliance risks, Paycom allows you to focus on what really matters, your customers.

 



Author Bio: Lauren is an enthusiastic writer who is passionate about numerous topics surrounding the HCM industry including talent management and acquisition, technology, document management and leadership, just to name a few. Lauren has been with Paycom for over a year and has taken on roles as a blogger, social strategist and community relations coordinator. In her spare time she enjoys DIY“ing,” exploring the city and keeping up with her two dogs, Deacon and Cookie.

IRS Continues to Enforce Affordable Care Act

IRS Continues to Enforce Affordable Care Act

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The IRS recently released an information letter indicating that the IRS continues to enforce the Affordable Care Act (ACA).

Dated June 30, Letter 2017-0010 was sent to a member of Congress who reached out to the IRS at the request of a constituent, a tax-exempt entity concerned it may owe an employer shared responsibility payment (ESRP) because it did not comply with the ACA rules on offering health insurance to its employees, for both financial and religious reasons.

The letter first provides a brief summary of the circumstances that might lead to a large employer owing an ESRP, and notes that there is no provision in the ACA that provides for the waiver of an ESRP.

The letter then addresses the effect of the president’s Jan. 20 executive order on the enforcement of the ACA. Titled “Minimizing the Economic Burden of the Patient Protection and Affordable Care Act Pending Repeal,” the order directed federal agencies to exercise discretion permitted to them by law to reduce potential burdens imposed by the ACA.

However, it did not change the health care law. The legislative provisions of the ACA are still in force until changed by Congress; therefore, taxpayers remain required to follow the law and pay what they may owe.

For more information on the executive order and the current tax filing season, visit https://www.irs.gov/tax-professionals/aca-information-center-for-tax-professionals.

What This Means for Employers

Since Congress has not yet passed a bill that would repeal the ACA, and Republicans have struggled to draft a bill that would receive majority support, employers should use caution and plan to comply with the law’s requirements unless and until the ACA is repealed and any new law’s provisions actually go into effect. Continued compliance may be required for a transition period, following passage of an ACA repeal bill, depending on the language of that legislation.

 

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Posted in ACA, Blog, Featured

Erin Maxwell

by Erin Maxwell


Author Bio: As a compliance attorney for Paycom, Erin Maxwell monitors legal and regulatory changes at the state and federal level, focusing on health and employee benefits laws, to ensure the Paycom system is updated accordingly. She previously served as assistant general counsel at Asset Servicing Group in Oklahoma City. She holds a bachelor’s degree from the University of Central Oklahoma and a J.D. from the University of Oklahoma. Outside of work, Maxwell enjoys politics, historical mysteries and spending time with her family.

Missouri minimum wage

Missouri Minimum Wage to Decrease from $10 to $7.70

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An overwhelming trend in the U.S. is cities and states increasing the minimum wage employers must pay their employees. However, St. Louis, Missouri is bucking this trend – although not willingly – by decreasing its minimum wage from $10 to $7.70, effective Aug. 28.

Court Battle

In 2015, St. Louis passed an ordinance raising its minimum wage to $10, with an automatic increase to $11 scheduled for January 2018. This prompted the Missouri legislature to pass legislation to pre-empt the ordinance from taking effect. The legislation was quickly enjoined in a lawsuit that went all the way to the Missouri Supreme Court.

In May of this year, St. Louis prevailed in the lawsuit and the minimum wage increased to $10. However, three months after the $10 minimum wage was implemented, the Missouri legislature passed another law disallowing any city in the state from having a higher minimum wage than the state, which is currently $7.70, this forcing St. Louis to reverse.

States vs. Cities

State governments dictating cities’ minimum wages is not altogether uncommon. In 2016, Alabama’s legislature shut down the Birmingham City Council’s efforts to raise its minimum wage. Similar efforts were undertaken by Ohio to block the City of Cleveland.

Other states have preemptively prohibited localities from passing minimum-wage ordinances – even before cities have commenced such efforts. Some of these states include:

  • Colorado
  • Idaho
  • Indiana
  • Kansas
  • Kentucky
  • Michigan
  • North Carolina
  • Oklahoma
  • South Carolina
  • Tennessee
  • Texas
  • Wisconsin

 

Although the St. Louis minimum wage decrease runs counter to the national trend, state legislatures prohibiting local increases is not uncommon. As more cities begin to adopt higher minimum wages, expect some state legislatures to push back.

Disclaimer: This blog includes general information about legal issues and developments in the law. Such materials are for informational purposes only and may not reflect the most current legal developments. These informational materials are not intended, and must not be taken, as legal advice on any particular set of facts or circumstances. You need to contact a lawyer licensed in your jurisdiction for advice on specific legal problems.

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Posted in Blog, Featured, Payroll

Jason Hines

by Jason Hines


Author Bio: Jason Hines is a Paycom compliance attorney. With more than five years’ experience in the legal field, he monitors developments in human resource laws, rules and regulations to ensure any changes are promptly updated in Paycom’s system for our clients. Previously, he was an attorney at the Oklahoma City law firm Elias, Books, Brown & Nelson. Hines earned a bachelor’s degree from the University of Central Oklahoma and his juris doctor degree from the Oklahoma City University School of Law, where he graduated cum laude. A fan of the Oklahoma City Thunder, Hines also enjoys exploring the great outdoors with his wife and daughter.

WOTC Tax Credits

What Tax Credits Are You Leaving on the Table?

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Federal tax credits for businesses are far from easy if you aren’t familiar with the program, and business leaders may find themselves in unfamiliar territory when it comes to their company’s eligibility for tax credits. As a leading provider of comprehensive human capital management software, we have found that the Work Opportunity Tax Credit (WOTC) is one Federal tax credit many leaders underutilize, meaning that they are leaving money on the table when it comes time to do their taxes.

In fact, one Paycom client in the fast-food industry found $447,000 in government-appropriated funds available once they took full advantage of the tax credits available to them. Read more about this client’s experience in our recent case study.

Is your organization is leaving money on the table?

The Purpose of WOTC

WOTC was designed to encourage employers to hire people from segments of the general population who have “consistently faced barriers to employment.”

On average, one in eight new hires potentially qualifies for the WOTC, and that number increases when it comes to the fast-food industry, in which one in four new hires is potentially eligible for the credit.

What WOTC Means for Your Company

Depending on which target group your new hire represents, the number of hours they work and the wages they earn determine the amount of the credit, you can receive up to $9,600 for each eligible new hire.

Like the client in our case study, you may find, that many of the people in your hiring pool are already eligible for the tax credit. They received an average of $1,128 per certified employee.

Who You Can Hire

Qualifying new hires can be full- or part-time workers. They must belong to specific “target groups” designated by the U.S. Department of Labor. These target groups are populations of people who are able and willing to work, but have found barriers to employment for a variety of reasons. Target groups include:

  • veterans
  • Temporary Assistance for Needy Families recipients
  • SNAP recipients
  • designated community residents (living in empowerment zones or rural renewal counties)
  • summer youth employees living in designated communities
  • long-term unemployed

 

 How You Can Receive These Tax Credits

To receive these tax credits, 8850 and 9061 forms must be completed on or before the job offer and sent to your state employment agency within 28 days of the employee’s first day of work. The client in our case study was able to save 75 hours (nearly two weeks of work!) by working with Paycom to process their available tax credits.

If you’re intimidated by or unaware of Work Opportunity Tax Credits, you’re not alone. But you might be missing out by leaving money on the table. Paycom clients using its tax credits service pay nothing for the search if they are found to have eligible employees. Want to learn more about WOTC? Sign up for our August 3 webinar “What’s New With WOTC” to learn the most up-to-date information on WOTC and ask questions specific to your business.

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Posted in Blog, Compliance, Featured, Franchises, Hospitality, Restaurant

Rich Stupansky

by Rich Stupansky


Author Bio: Rich came to Paycom in January of 2010 from Cleveland Ohio and is the Director of Tax Credits at Paycom. Rich was instrumental in developing and creating our tax credits program. Rich has more than 12 years’ experience with federal tax credits and an extensive background in working with companies of all sizes to maximize their full tax credit potential.

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