Form 8846 gives certain good and beverage establishments a general business tax credit. The credit applies to Social Security and Medicare taxes that the employer pays on some employee tips. Filing this form can help your business reduce its tax burden. Therefore, it’s worth researching it to see if you quality for tax credit.
Can I File Form 8846?
You can file Form 8846 if you meet two requirements. These requirements are:
Your employees earned tips from customers for their service and/or delivery work at your food/beverage establishment where tipping is customary.
You must pay employer Social Security and Medicare taxes on those tips.
Both of these conditions must apply in order for you to be eligible to file.
What Is Form 8846?
Certain establishments can use Form 8846 to claim a credit. This credit will reduce how much your business owes at the end of the tax year. It’s part of the general business credit.
The form in itself is very simple. It’s six lines in total, all of which are very easy to fill out as long as you have your employees accurately reporting their tip income. This is a huge responsibility and something that many businesses struggle with.
If employees fail to accurately report their tip income, it will hinder your business. And it can leave you exposed to certain penalties. That’s why tax season is always a great reminder to teach your employees about the importance of accurate tip reporting. It never hurts to remind them of the consequences they could face, too.
After all, if your employees consistently and accurately report tips to you (like they’re required to), it will save you a great deal of time and frustration come tax time. It can even save you money in two different ways. First, accurate reporting protects you from fines and penalties. Second, it allows you to claim as many credits as possible.
If you have all the numbers in front of you, you can fill out the form in 5 minutes with ease. That’s a small time commitment to make with the potential of receiving a substantial tax credit in return.
You will have to provide the following information in this form.
Total amount of tips received by your employees for which you paid/incurred employer Social Security and Medicare taxes.
Total amount of tips not subject to the credit provisions. Note: Most establishments will enter zero on this line. You will enter zero if you paid your tipped employees the federal minimum wage rate or more (excluding tips). If you didn’t, keep reading for more information.
Total amount of creditable tips. Get this amount by subtracting line 2 from line 1. If you enter zero on line 2, you’ll still have your original amount.
The remaining steps are simple enough. You’ll take the amount on line 3 and multiple it by 0.0765 (or 7.65%). There is a special step you must take in the rare event that a tipped employee earned more than $128,400 (through wages and tips combined) in the given tax year.
The next line asks you to document any credits you may already receive for the employer portion of Social Security and Medicare taxes for certain employee tips. This applies only to partnerships and S corporations. The last step is to add this number to the number you put on line 4. Combine the two and you have your total tax credit.
Depending on the amount your employees earn in tips, your credit could be hundreds or potentially thousands of dollars.
How Big Is the Credit?
Your credit isn’t going to zero out your tax bill, but it will definitely pay for the time you spent figuring it. Generally, the credit will be equal to the amount of employer Social Security and Medicare taxes you paid/incurred on employees’ tips.
That means filing Form 8846 will typically reduce your taxes so you do not have to pay an employer portion of Social Security and Medicare taxes on employees’ tips at all. How much that will save you depends on a few factors.
For example, a food cart with just one or two employees may only receive $1,200 in tips during the tax year. That could equate to under $100 owed by the employer on these tips for Social Security and Medicare taxes. Your credit would generally be equal to that amount, saving you just under $100 on your tax return.
A larger establishment, on the other hand, may have a dozen or more employees working throughout the year. Each one could be earning hundreds of tips in a single month. That could leave an employer paying thousands of dollars towards the employer portion of Social Security and Medicare taxes on those tips.
In any case, it’s definitely worth saving the money.
Frequently Asked Questions
As with most things during tax season, Form 8846 can be confusing. Here’s a look at some frequently asked questions regarding it. These cover more information on who can file and when you can file. You’ll also learn more about what to do if you pay employees less than the federal minimum wage.
Can I Get the Credit Without Filing?
Not everyone has to file Form 8846 in order to claim the credit. It depends on your legal structure. If you operate as a partnership or S corp, you must file in order to get the credit. You’ll file this form and include the amount of the credit on Schedule K.
But other taxpayers may not have to file the form at all. Instead, you may be able to claim the credit on line 4f in Part III of Form 3800, General Business Credit. Of course, if you aren’t sure, you should always ask a professional tax advisor. Failing to file properly could lead to hiccups and confusion.
Can I Still Claim the Credit If I Pay Under Minimum Wage?
An important consideration to keep in mind while filing is the total amount of tips you are able to claim this credit for. If you pay your employees the federal minimum wage as their starting wage (before tips), you won’t run into any roadblocks. However, employers who pay less than that will not be able to claim 100 percent of employee tips for this credit.
Instead, the IRS will have you do some extra math. This math will ultimately have you count a portion of employee tips to make up for the difference between what you pay them per hour and the minimum wage rate. In 2019, the federal minimum wage rate is $7.25 per hour.
Let’s say an employee works 100 hours at just $5.25 per hour. They earn $525 in wages and an additional $500 in tips. However, you cannot claim all $500 as tips for the purposes of this credit. You must first calculate how much that employee would have earned (before tips) if you paid them the federal minimum wage rate. The answer is $725 in wages.
So, the IRS will have you subtract $225 from your employees’ earned tips when filing for this credit. You are deducting the difference between what they would have made if you paid minimum wage ($725) and what they actually made in wages ($525). So, their $500 in tips goes down to $275 for the purposes of this credit.
What If I Didn’t File Previously?
Did you qualify last year but fail to file for the credit? Don’t fear! You can actually file this form up to three years from the due date of a return. So, if you just learned about this credit, it may be worth going back through previous years’ returns and updating them.
There are certain steps you’ll have to take in order to do this properly and receive a credit. Filing an amended return can be confusing. It will also require digging up some old records.
After all, you need to know the amount of employee tips you received during the given tax year. You also need to think back and compare employee wages to the year’s federal minimum wage to see if you need to deduct any tips before calculating the credit.
If you are a smaller establishment, it might not be hard to dig up the necessary records and get your credit. If you are a larger establishment, it may be more difficult to file now, but the sheer size of the credit may justify the legwork.
Claim All Your Credits
Tax season is one of the biggest headaches of the year. But it’s not something you should rush to get over with. As a business, you have the potential of taking many different credits. Doing so could greatly reduce your tax burden. So, why would you miss out and end up paying more?
Every year, many business owners unintentionally miss out on big credits simply because they lack the know-how to find and file for them. Honest Buck Accounting can make sure that you get all the credits you’re entitled to. Our professional guidance will save you time and potentially a lot of money by filing correctly year after year. Learn more here.