Credit for Portion of Employer Social Security Paid with Respect to Employee Cash Tips (IRC 45 B Credit)
Are You Getting the Credit You Deserve? Here's a Hint.
If you are an employer in the food and beverage industry, you may be entitled to a credit for the social security and Medicare taxes you pay on your employees' tip income. This credit is available under Internal Revenue Code (IRC) section 45 B, Credit For Portion Of Employer Social Security Paid With Respect To Employee Cash Tips. You must meet both of the following requirements to qualify for the credit:
- You had employees who received tips from customers for providing, delivering, or serving food or beverages for consumption; and
- You paid or incurred employer social security and Medicare taxes on these tips.
The credit applies only to tips received by food and beverage employees. It is not applicable to other tipped employees.
The IRC section 45 B credit is available for taxes paid after December 31, 1993. The credit is available without regard to whether your employees reported the tips to you pursuant to IRC section 6053(a). You can claim or elect not to claim the credit anytime within three years from the due date of your return on either your original return or an amended return.
Minimum Wage Effect
The credit equals the social security and Medicare taxes you paid on the tips received by the employees. However, no credit is given for tips used to meet the federal minimum hourly wage rate. For example, if the minimum wage rate was $5.15 per hour, and you paid the employee $3.75 per hour and applied tips of $1.40 per hour to reach the $5.15 minimum wage, then the $1.40 per hour in tips cannot be used toward the credit. If, however, you paid each employee an amount equal to or more than the minimum wage without including tips, then you can compute the credit on all reported tips. Note: The Small Business Work Opportunity Act of 2007 froze the federal minimum wage at $5.15 per hour for computation purposes, even though it will reach $7.25 per hour by the summer of 2009.
Treatment of IRC 45B credit
The credit is part of the general business tax credit and is claimed on Form 8846, Credit for Employer Social Security and Medicare Taxes on Certain Employee Tips. Since it is an income tax credit, claimed on an income tax return, you may use it to offset any regular income tax liability, but not employment tax liabilities. A credit is a dollar for dollar reduction of your regular tax liability, where an expense deduction only reduces your taxable income. Therefore, credits are usually more beneficial. You cannot claim both the credit AND the expense deduction. If you claim the credit, you must reduce your social security and Medicare tax deduction accordingly. You and your accountant should evaluate, annually, whether the credit or the expense deduction is more beneficial to you.
The IRC 45B credit is not refundable which means if the credit reduces your regular income tax below zero, to a negative amount, the negative amount is not sent to you as a tax refund. However, it is subject to carry back and carry forward provisions of the Internal Revenue Code, as are other components of the business tax credit. See IRC section 39. Credits arising in tax years beginning after December 31, 1997 may be carried back one year and forward 20 years. Credits arising in tax years beginning before 1998 may be carried back three years and forward 15 years. If you intend to carry back or carry forward.
Note: This page contains one or more references to the Internal Revenue Code (IRC), Treasury Regulations, court cases, or other official tax guidance. References to these legal authorities are included for the convenience of those who would like to read the technical reference material. To access the applicable IRC sections, Treasury Regulations, or other official tax guidance, visit the Tax Code, Regulations, and Official Guidance page. To access any Tax Court case opinions issued after September 24, 1995, visit the Opinions Search page of the United States Tax Court.