QR8: How does application of the payroll tax exemption to wages paid to restaurant employees affect the 45B credit?
A-QR8: Certain food and beverage establishments can claim a credit under section 45B of the Internal Revenue Code for social security and Medicare taxes paid or incurred by the employer on certain employee tips, referred to as the “45B credit.”

An employer could be eligible for both the payroll tax exemption and the 45B credit on certain tips if the employer has tipped employees who are also qualified employees under the HIRE Act.  The payroll exemption is taken on the employer’s Form 941 and the 45B credit is taken on the employer’s income tax return.

The payroll tax exemption applies to all wages paid to a qualified employee unless the employer elects out of the payroll tax exemption with respect to the employee. An employer that applies the payroll tax exemption with respect to a qualified employee will be entitled to a smaller 45B credit because the employer will pay only Medicare tax (and not social security tax) on the employee’s wages, including reported tips.

This obviously complicates the Form 8846. PayMaster will have to credit just the Medicare portion on employees who have the HIRE ACT exception taken.

Thankfully the IRS will not revise Form 941 for the third and fourth quarters of 2010. Employers will be directed by the form and the instructions to leave lines 12c and 12d blank on the returns that they file for the third and fourth quarters.

From the ruling:

“In a prior tax year an employee receives cash tips which constitute wages but the employee fails to report the tip amounts to his or her employer in the year the tips were received. Thereafter, the employee’s employer receives in the current tax year a notice and demand for the employer share of FICA taxes with respect to the tip amounts the employee received in the prior year. The employee’s employer seeks a current year credit under section 45B for the amount of FICA tax.”

The common sense ruling asserts that the employer can’t pay the taxes or take the FICA Credit until they are made aware of the undeclared tips.

They conclude that they “find no basis for concluding that the excess social security tax amounts arise in the year in which the tips are actually received by the employee. Thus, the Code section 45B credit is available to the employer in the year of notice and demand not the year in which the unreported tips were received by the employee. ”

NOTE : Even though the employer’s liability and credit is given in the current year, the wage base and tip credit still needs to be computed based on the year that the tips were actually earned.

The OASDI tax rate for wages paid in 2009 is set by statute at 6.2 percent for employees and employers, each. Thus, an individual with wages equal to or larger than $106,800 would contribute $6,621.60 to the OASDI program in 2009, and his or her employer would contribute the same amount. The OASDI tax rate for self-employment income in 2009 is 12.4 percent.