What is the 45(B) credit?
How and when do I claim the tax credit?
What's the credit worth?
Are all restaurateurs eligible to claim the credit?

Important Note
The information below is intended only to inform and not to be a substitute for the reader's seeking legal counsel. Any information given here should be examined by the reader's attorneys as to such information's applicability.

What is the 45(B) credit?

If you employ tipped workers, you may be eligible to claim a federal income tax credit — known as the 45(B) credit — for the FICA taxes (Social Security and Medicare taxes) you pay on your employees' tips. The tax credit, named after a section of the federal Internal Revenue Code, is a "general business credit" that lets restaurateurs reduce their federal income taxes by the amount of FICA (Social Security and Medicare) taxes they pay on certain employee tips. The U.S. Congress established the credit in 1993.

How and when do I claim this tax credit?

To calculate and claim the credit, you are required to fill out IRS Form 8846, Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips, and file it with your federal income tax return. To get Form 8846, call the IRS at (800) TAX-FORM or download a copy at the IRS Web site.

What's the 45(B) credit worth?

Calculating the value of your 45(B) credit is fairly simple. In general, you receive a credit for any FICA taxes you pay on tips beyond those tips used as a "tip credit" to meet your obligation to pay employees the federal minimum wage.

Here's an example. Say you operate in a state where employers pay the federal minimum wage of $5.15 and take the maximum "tip credit" ($3.02) currently allowed under federal law. This means the employee is receiving a cash wage of $2.13 an hour ($5.15 minimum wage minus $3.02 allowable federal tip credit). Say this employee averages $8.00 an hour in tips. Here's how to calculate the credit:

* The 7.65% FICA payroll tax, which employers and employees each pay on workers' wages, includes two components: Social Security and Medicare. The Social Security tax, 6.2%, is paid on wages up to $80,400 a year. The Medicare payroll tax, 1.45%, is assessed on all wages.

Are all restaurateurs with tipped employees able to claim the credit?

Yes, with some limitations. An experienced acountant can help restaurateurs of all sizes understand how to take advantage of the credit. You should be aware of the following:

• You must owe federal income taxes to claim the credit. Because you can use the 45(B) credit only to the extent your company owes federal income taxes, there may be some restaurateurs — those who break even or lose money, and thus have no taxable income — who cannot take advantage of the credit. However, with some limitations even operators without federal income tax liability in a particular year may carry the credit back (three years) or forward (15 years) to a year in which they owed, or will owe, federal income taxes.

• You may not claim both a credit and deduction. Restaurateurs who take the 45(B) credit may not deduct those same FICA taxes as a business expense.

• Beware the AMT. If you are required to pay an alternative minimum tax (AMT), there is a possibility you may not be able to take full advantage of the FICA tax credit. Talk to your accountant for details.

Last updated: June 1, 2001