SOCIAL SECURITY

Office of the Chief Actuary

SOCIAL SECURITY ADMINISTRATION BALTIMORE MD 21235-0001

March 8, 2013

The Honorable John B. Larson

The Honorable Vern Buchanan

House of Representatives

Washington, D.C. 20515

Dear Mr. Larson and Mr. Buchanan:

I am writing in response to your December 20, 2012 letter requesting an estimate of the effect on 

the Social Security financial status of a proposal to repeal the employer FICA tax credit on tips 

for food and beverage workers that was enacted in 1993 (Internal Revenue Code 45B). Our 

revenue team (Patrick Skirvin, William Piet, Anthony Cheng, Sven Sinclair, Alice Wade, and 

Karen Glenn) developed an estimate for the effect on Social Security and Medicare payroll tax 

liability in the near term and the long term. We consulted with Dr. Donald Bruce of the 

University of Tennessee, as well as staff at the Joint Committee on Taxation, in the development 

of the estimates.

We estimate that eliminating the credit effective January 1, 2014 would result in a small 

reduction in reported tips. The reduction in reported tips would lower payroll tax revenue over 

the period 2014 through 2023 for Social Security (OASDI) and Medicare (HI) by about $1,157 

million and $271 million, respectively. The effect on the long- range financial status of these 

programs would be negligible (less than 0.005 percent of taxable payroll). We consulted with the 

Joint Committee on Taxation and found that their assumptions and estimates on this proposal for 

FICA taxes are similar to ours. We cannot comment on whether any increase in revenue to the 

Treasury from eliminating the credit would be more than offset by loss of tax revenue for Social 

Security and Medicare.

Under current law, employers of food and beverage workers receive a credit from the General 

Fund of the Treasury equal to the amount of their payroll tax liability on tips that raise employee 

compensation above $5.15 per hour. The intention of this credit is to encourage higher levels of 

reported tips. The credit results in increased payroll tax revenue for both the OASDI and HI 

programs to the extent that reported tips are increased.

The proposal would eliminate the credit and would thus result in somewhat lower reported tips 

and payroll tax revenue in the future. Based on the modest effect that implementation of the 

credit in 1993 had on reported tips in years after 1993, we estimate that elimination of the credit 

would ultimately result in a 15-percent reduction in reported cash tips and a 2-percent reduction 

in reported credit card tips. Overall, this would mean a reduction of about 5 percent in reported 

tips. Assuming enactment in 2013 with the credit eliminated starting January 1, 2014, we 

estimate changes in tax liability shown in the table below.
2

Estimated Effect on Payroll Tax Revenue

for Proposal to Eliminate Employer Credit

on Tips that Raise Food and Beverage

Worker Compensation above $5.15 per 

Hour

Calendar Reduction in Tax Revenue

Year OASDI HI

 millions

2014 $46 $11

2015 74 17

2016 105 24

2017 112 26

2018 119 28

2019 127 30

2020 136 32

2021 141 33

2022 146 34

2023 151 35

2014-23 1,157 271

If we may be of any further assistance on this or other matters, please let us know.

Sincerely,

Stephen C. Goss

Chief Actuary

Enclosure