The Treatment of Tips under the FLSA: Taxes

Employers are entitled to a credit on social security and Medicare taxes paid on tipped income that brings an employee’s hourly rate over the standard minimum wage.  This credit only applies to tips received by food and beverage employees.  The tip credit is added to an employer’s profits and is thus subject to income tax liability.  See Ronald L. Noll, Accountant’s Corner: Take Advantage of the Tip Credit, available at http://www.restaurantreport.com/departments/ac_tipcredit.html (last visited June 10, 2010); Credit for Portion of Employer Social Security Paid with Respect to Employee Cash Tips (IRC 45 B Credit), available at http://www.irs.gov/businesses/small/industries/article/0,,id=98463,00.html (last visited June 10, 2010).

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