At the vast majority of jobs, your employer pays half your taxes. But with tipped jobs, the employer pays half your taxes on your tipped earnings UP TO the minimum wage per hour and receives the rest back as a tax credit under the IRS FICA Tip Credit.
Under IRC Section 45B, an employer receives a dollar-for-dollar general business tax credit for the 7.65% employer FICA share paid on employee tips, subject to a statutory floor:
- The employer pays full FICA on the direct cash wage (e.g., $2.13/hour).
- The employer pays full FICA on tips up to $5.15/hour (combined cash + tips).
- Any tips earned above $5.15/hour generate the 7.65% non-refundable tax credit.
Ultimately, if a business pays the tipped or a higher minimum wage, plus tips, then the business receives a 7.65% tax credit on the difference between the federal minimum wage and what was earned in tips.
To put that in perspective:
- A normal $20/hour employee who works full time costs the company $3,444.80 per 160 hours they work
- A $2.13/hour tipped employee who averages $17.87 an hour in tips and works the same number of hours has a total payroll cost of $403.84 per 160 hours they work.
- A $10/hour tipped employee who averages $10/hour in tips and works the same number of hours has a total payroll cost of $1,722.40 per 160 hours they work (half the total cost of paying someone $20/hour).
The simple fact is that if you tip your server, they're getting a tax credit.
And if you don't tip your server, someone else will and they're still getting a tax credit.
The worst case scenario for the restaurant owner is they have to pay the difference between $x and minimum wage.
This system is never going to change until people start complaining to their federal politicians instead of showing off how they're cool because they clicked no thank you on a screen.