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New Massachusetts Tip Reporting Calculations and FICA Tip Credit Refresher

Massachusetts employers with tipped employees are now required to calculate tipped employees’ wages at the end of each shift as opposed to the end of pay period. This new law was passed in June 2018 and employers were required to put into action beginning January 2019. While this law will present administrative challenges, it is also likely that employers will be required to pay employees additional amounts to ensure they receive at least minimum wage during slower shifts.

In 2019, Massachusetts employers of tipped employees can pay their employees at a service rate ($4.95 in 2020), which is less than the basic minimum wage ($12.75 in 2020) by claiming a tip credit. To claim a tip credit, (1) the employer must inform affected employees in writing of how a tip credit works; (2) the employees must regularly receive gratuities exceeding $20.00 each month; (3) the employees must retain all tips received by them, or tips must be distributed to them through a valid tip-pooling arrangement; and (4) the sum of the service rate and the tips received by the employees must equal or exceed the basic minimum wage. If an employee’s service rate and tips totals less than the basic minimum wage, the employer is required to pay the employee the difference in their next regular paycheck.

Under the old law, employers could perform this calculation at the end of each pay period. Effective January 1, 2019, employers are required to calculate at the end of the employee’s shift. To illustrate the difference in the new law, the Massachusetts Office of the Attorney General has provided the following example (based on 2019 rates):

  • A server works one 5-hour shift on Tuesday and one 5-hour shift on Saturday during the same pay-week.
    • Tuesday: $21.75 from the service rate ($4.35 x 5 hours) + $20 in tips = $41.75 total
    • Saturday: $21.75 from the service rate ($4.35 x 5 hours) + $100 in tips = $121.75 total
  • Under the OLD law:
    • No action is required by the employer as the total wages for the pay period exceed the requisite $120.00 basic minimum wage ($12.00 min wage x 10 hours worked)
  • Under the NEW law:
    • The employer is required to add $18.25 ($12.00 min wage x 5 hours worked, or $60.00 less $41.75 wages received) to the employee’s next paycheck to cover the differential for the shift.
  • The result/impact of the new law is that gross wages for the pay period in this example would be $181.75 ($18.25 + $41.75 + $121.75), an $18.25 increase from the $163.50 gross wage total under the old law.Employer takeaways based on the above:
  • The new law does not change when tipped employees must be paid in Massachusetts. Instead, the law requires employers to change when they calculate tips so that tipped employees receive at least minimum wage for hours worked per shift.
  • Massachusetts employers with tipped employees may want to review their payroll policies to ensure they are in compliance with the law.
  • Note that tips earned in one day that are in excess of the minimum wage cannot offset another day where there was a shortfall.
  • Failure to calculate and pay employee wages timely and accurately exposes employers to potential treble damages, attorneys’ fees and criminal penalties.

FICA Tip Credit

As mentioned above, claiming the FICA tip credit allows employers to pay employees at the 2020 service rate of $4.95. But more specifically, the FICA Tip Credit is a federal tax credit to provide relief to employers who pay FICA tax (Social Security tax and Medicare tax) on tip income that was paid by customers. The credit applies to the tip income that is in excess of what is needed to bring the employee’s wages up to the basic minimum hourly rate.

The FICA tip credit reduces federal tax but is non-refundable. Instead, any excess credit will be carried forward for use in future tax years. This applies to both Corporation tax returns as well as pass-through entities such as Partnerships and S-Corporations that flow through to the owners’ personal tax returns (1040’s).

The calculation of the FICA tip credit can be a bit complex:

  • Multiply the number of hours the employee worked times $5.15 (the federal minimum wage rate in 2007 when the credit was enacted) to determine the federal minimum wage amount for the employee.
  • Subtract from that number the actual wages paid to the employee to arrive at the amount of tips not eligible for the credit.
  • Subtract the amount of tips not eligible from the total tips reported by the employee to determine the amount of creditable tips.
  • Multiply the creditable tip amount by the FICA tax rate, currently 7.65 percent, to determine the amount of credit available.

Please note that the above calculation should be handled by your payroll company. They should provide you with a FICA tip report at the end of each fiscal year that lays the above information out for your tax preparer.

Please let us know if you would like us to assist your restaurant company with tip reporting or claiming the FICA tip credit. We would be happy to review any questions you may have and do an in-depth analysis of your company. Contact us directly or through www.newburg.com .

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