To relieve their financial burden, the federal government allows these business owners to claim a tax credit each year on their returns. By understanding the IRC 45 B credit, these businessmen and women can discover how much they can claim and for what purpose this credit serves.

Defining the IRC 45B Tax Credit

The IRC 45B tax credit was designed to compensate business owners who have employees who receive tips from customers. The employers are expected to apply the tips to the employees' wages and pay in the expected amount of money to Social Security and Medicare.

This credit can be claimed by employers who compensate employees' wages to meet or exceed the federal minimum wage. The amount used to bring employees' wages up to minimum wage cannot be claimed as a credit, however. Any money used to bring employees' wages above that amount can be used as a credit. 

For example, if a restaurant owner applies $1.40 an hour of a waitress' tips to bring her wage up to $5.15 an hour, the capped minimum wage for tipped restaurant staff, the owner cannot claim the $1.40 as a credit. However, any amount that is applied and goes beyond $5.15 an hour can be claimed as a credit.

Defining Tips

Before business owners can claim the IRC 45B tax credit, they should understand how the IRS defines tips. According to the IRS, tips are defined as compensation:

• Which amount is solely determined by the customer
• Which recipient is determined solely by the customer
• That is not demanded nor expected by the business or its owner and staff
• Made freely by the customer without compulsion

Employers are expected to pay 4.2 percent of each employee's tips to Social Security and 1.45 percent to Medicare.

Arguments to Repeal or to Keep the IRC 45B Tax Credit

Discussion is underway in Washington D.C. about whether or not this tax credit should be repealed. People who favor its repealing say that the credit does more harm than good. 

If it is repealed, it would encourage more businesses to provide compensation to staff through tips than wages. In essence, repealing the tax credit would save the government money.

However, the credit still has its fair share of supporters who argue that the IRC 45B exemption is necessary for business owners to survive. The credit makes it easier for these owners to offset Social Security and Medicare payments, thereby bolstering these businesses' profitability.

The credit also is a fair way to reimburse employers who pay into these government programs. Because it is a fair and easy way for employers to be reimbursed for expenses they are expected to pay on time regularly, the credit also encourages employers to monitor tip reporting to ensure that it is legal and accurate.

Supporters say that eliminating the credit would encourage tip reporting fraud and also lead to a 15 percent reduction in cash tips being reported at all. Likewise, tips made via credit card sales would be reported two percent less than what they are now. Politicians are expected to vote by the end of 2015 on whether or not to keep the credit.

People who own businesses like bars and restaurants and employ tipped staff are expected to pay into Social Security and Medicare based on the amount of tips those employees make. They can use the IRC 45B tax credit to relieve this burden and also learn what other purposes this credit serves.