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Tips Against Minimum Wage and FICA Tax Credit

Overview

This article explains two important features in the Employer Setup Page-3 of ProPay:

  1. Check Here To Apply Tips Against Minimum Wage
  2. Credit For FICA Taxes Paid On Excess Tips

These features help employers manage tipped employees' wages and calculate tax credits related to FICA taxes on excess tips.

Feature Details

Check Here To Apply Tips Against Minimum Wage

When this box is checked, ProPay will:

  • Warn you when a tipped employee's gross pay falls below the state's minimum wage
  • Ask if you want to increase the employee's pay rate (for that paycheck only) to meet the state's minimum wage requirements
  • Compare the employee's pay rate against the state's minimum wage during paycheck entry
  • Offer the option to increase the employee's pay rate for any paycheck to meet the state's minimum wage requirements

Credit For FICA Taxes Paid On Excess Tips

When this box is checked, ProPay will:

  • Automatically calculate any over-paid FICA and Medicare taxes on excess FICA tips
  • Take into account the federal minimum wage in these calculations
  • Display these calculations in the last 3 columns of the Taxable Wages Report under User Defined Reports

FICA Tax Credit Calculation

ProPay uses the following formula to calculate the FICA tax credit:

  1. Tips deemed to be wages = (Total hours × FICA Tip Credit minimum wage ($5.15)) - (Gross - Tips)
  2. Excess FICA tips = Regular tips - Tips deemed to be wages
  3. FICA Tax Credit = Excess tips × (FICA + Medicare rate)

Note: The $5.15 rate used in this calculation is the frozen minimum wage rate for FICA tip credit purposes, as established by the Small Business Work Opportunity Tax Act of 2007. This is not the current federal minimum wage.

Using the FICA Tax Credit Information

The figures from the Taxable Wages Report can be used to fill in Form 8846 "Credit for Employer Social Security and Medicare Taxes Paid on Certain Tips."

Troubleshooting

If you encounter issues with these features:

  1. Verify that the correct boxes are checked in the Employer Setup Page-3
  2. Ensure that all employee information, including hours worked and tips received, is accurately entered
  3. Double-check the state and federal minimum wage rates in your ProPay settings

Additional Information

For more detailed information on Tips Against Minimum Wage regulations in your client's state, please contact the State Department of Labor.

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