Social Security Tax and Employee Tips

By | March 15, 2015

Do you have to play social security taxes on employee tips?

This credit relates to the Social Security taxes you pay on an employee’s cash tip income which is treated (for tax purposes) as paid by you to the employee. The credit applies with respect to tips received from customers in connection with the provision of food or beverages, regardless of whether the food or beverages are for consumption on or off the premises. It is very important that workers in these industries report tips for social security tax purposes and this will also help them build social security savings.


Reporting Tips as Wages

These tips are required to be reported to you by the employee; however, you may still take the credit even if the employee did not report the tips to you.

The credit only applies to the tip income in excess of that needed to bring your employee’s wages up to $5.15 per hour, which was the minimum wage on Jan. 1, 2007. (In 2007 tax legislation that was tied to passage of the increase in the minimum wage, Congress in effect froze the FICA tax credit based on pre-2007 law so that the credit wouldn’t be affected by any subsequent increase in the minimum wage.)



Calculating Social Security Tax on Tip Income Example

Example: Felix is a waiter in the ABC Restaurant. He is paid $2 an hour plus tips. During the month, he works 160 hours for $320 and receives $2,000 in cash tips which he reports to his employer. Felix’s $2 an hour rate is below the $5.15 minimum wage rate (as in effect on Jan. 1, 2007) by $3.15 an hour. Thus, for the 160 hours worked, he is below the minimum rate by $504 (160 × $3.15). For Felix therefore, the first $504 of tip income just brings him up to the minimum rate. The rest of the tip income is $1,496 ($2,000 # $504). Felix’s employer pays Social Security taxes at the rate of 7.65% for Felix.


Social Security Tax on Tip Income

The employer’s credit is thus $114.44 for the month: $1,496 × 7.65%. Social security taxes paid with respect to tip income used to determine the credit cannot also be deducted (but you can elect not to take the credit, in which case you can claim the deduction)