As Granite State businesses know all too well, working with a savvy and experienced business tax preparation firm is essential to make sure their IRS returns are rock solid. Working with the right tax preparation firm can also give businesses a leg up when it comes to capturing every potential tax break and tax deduction to save them money. A consultant with one of the leading corporate tax preparation firms in the state shared some valuable insight now that tax season is here again.

Nathan Walker, CPA, Business Tax Manager, Mason & Rich, masonrich.com

Q: Can you provide guidance on common tax deductions and credits that businesses often overlook during tax preparation that could potentially save them money?

A: One of the most commonly overlooked credits is the “tip credit” or the “credit for employer Social Security and Medicare tax paid on certain employee tips,” as the Internal Revenue Service verbosely calls it. It is a credit available to an employer equal to the employer’s portion of payroll taxes paid on tipped wages in excess of the tipped employee federal minimum wage, currently $5.15. With the significant pressure on wages the COVID-19 pandemic put on the service sector, this credit is more likely to be applicable to employers with tipped employees.

Here’s how the credit works. If all of your employees are paid a base wage equal to or in excess of the tipped employees federal minimum wage, then all of the tips reported through payroll which were subject to payroll taxes are eligible for the credit. If a portion of the tips are needed to achieve the federal minimum wage, then only the excess is eligible for the credit. The general logic behind the credit is that the employer should only be responsible for paying payroll taxes on the amount up to the federal minimum wage.

The IRS offers the credit to encourage employers to report tips through their payroll process. This helps ensure that the tips are reported by the employee on their personal tax return, thereby being subject to income tax. The tip credit prevents the employer from paying payroll taxes on tips which might otherwise not be declared.

Calculation of the credit is easy when the employer pays all employees in excess of the tipped minimum wage. Simply send your tax preparer the total tips paid to all employees, and they should be able to calculate the credit for you. However, if any employee is paid less than the minimum wage, you will need a “tip credit report” from your payroll provider. Employers should be certain to notify their payroll provider that they will be requesting this report. Some payroll providers are unable to provide this information if the option was not selected at the start of the year.

With the pressure on wages in the service sector, the “tip credit” is more likely to be applicable to employers with tipped employees.