How do I Calculate Tax Credit?
Employers are required to pay employee and employer Social Security and Medicare tax on tip income. However, a credit is available equal to the employer's Medicare and Social Security tax obligation for reported tips in excess of those treated as wages to satisfy the federal minimum wage.
Tax Credit Calculation calculates a tax credit based on the employer's portion of Social Security and Medicare Tax on tip income in excess of the amount used to meet the federal minimum wage requirement.
In the Tips application, use Tax Credit Calculation to calculate the tax credit. Tax Credit Calculation is not an update report, so you can run it as often as you like.
Minimum Wage Due Calculation
Tax Credit Calculation calculates the minimum wage due by multiplying the federal minimum wage by the employee's hours worked and verifies the minimum wage by comparing the federal minimum wage effective date with the payment date of the tip pay record. If no federal minimum wage is found, the application ends the report and prints an error message.
Tip Credit Calculation
Tax Credit Calculation calculates the tip credit by subtracting the wages (excluding tips) from the minimum wage due.
| If | Then |
|---|---|
| The tip credit is zero | the employee information prints on the report. |
| The tip credit is negative (voids) | the application processes the records and prints the information on the report. |
| The tip pay record has only hours (an adjustment) | the employee information prints on the report, but no amount exists for the calculation. |
| The tip credit exceeds the actual tip amount | an error message prints on the report. You can report tip credit only up to the amount of actual tips reported. |
| The employee has multiple tip records and one of those records has a tip credit greater than tips reported due to a shortage | the application recalculates the shortage with the other tip records that have excess tips. |
Excess Tips Calculation
Tax Credit Calculation calculates excess tips by subtracting the tip credit from the reported tips.
Excess Tips Verification
Tax Credit Calculation compares excess tips with Social Security taxable wages for the payment, with the following results:
| If | Then |
|---|---|
| Social Security taxable wages are greater than excess tips | the application uses the total of the excess tips in the calculation. The amount of excess tips prints separately for Social Security and Medicare. |
| Social Security taxable wages are less than excess tips | the application uses the amount of Social Security taxable wages as the excess tips in the calculation. The amount of excess tips prints separately for Social Security and Medicare. |
| No Social Security employee payment deduction records exist for the payment because the Social Security taxable wages limit has been met | excess tips are zero. |
| There is no limit for Medicare taxable wages | the application uses the total excess tips in the calculation. |
Tax Credit Calculation
Tax Credit Calculation calculates the tax credit by multiplying the excess tips by the Social Security and Medicare rates.