FICA Tip Credit under Fire on Capitol Hill and the White House

It's no secret that there's gridlock in Washington, but a Congressman and the White House have come together to agree on one issue: repeal of the FICA tip credit (IRC section 45B) as part of larger tax reform packages. This credit currently allows restaurants and bars to claim an income tax credit for employer-paid payroll taxes on certain employee tips. The credit was created with the Omnibus Budget Reconciliation Act of 1993 with the intentions of encouraging accurate tip reporting and securing Social Security benefits for tipped workers, according to the National Restaurant Association.

If your restaurant employs staff members who earn tips, it's important to take note of the calls for the FICA tip credit’s repeal. The Obama administration’s FY 2016 Revenue Proposal would repeal the credit, effective for taxable years beginning after December 31, 2015.  Proponents of the repeal suggest that the cost of the tip credit outweighs the positives associated with boosting tax compliance, and that allowing tax benefits for tips supports employers’ practices of providing income in the form of tips as opposed to wages.

The National Restaurant Association and other supporters of the credit note that while many tax reform proposals promote repeal of tax credits in favor of lower tax rates, the FICA tip credit is different. It is intended to reimburse employers for the FICA tax paid on tips and to encourage accurate tip reporting. It was structured as a tax credit because employment tax rules made it difficult to offset Social Security payments. According to the NRA, the Social Security Chief Actuary projected that the repeal would cause a 15 percent reduction in reported cash tips and a two percent reduction in reported credit card tips.

As part of its efforts to preserve the FICA tip credit, the NRA is meeting with congressional members to educate them on the benefits of keeping this credit.  At a meeting with the Joint Committee on Taxation (JTC), the JTC asked for additional information on tipping practices in the industry, such as specific company information from Forms 8027 regarding cash and credit card tips, as well as information regarding gift card usage.  The NRA is collecting this information and will pass it on to the JCT.  

Interested in the potential impacts of the tip credit repeal? We can help.  Contact your BDO Restaurant practice professional with questions.