FICA Tip Credit (Section 45B): How It Works and How to Claim It

What Is the FICA Tip Credit?

The FICA tip credit is a federal income tax credit under Section 45B of the Internal Revenue Code. It gives back the employer share of Social Security and Medicare tax (7.65%) that a business pays on its employees’ tips.

Employees report their tips to the employer, and the employer pays FICA tax on those tips as wages. The credit returns most of that employer tax, dollar for dollar, as a reduction in income tax.

Who Qualifies for the FICA Tip Credit?

An employer qualifies if both of these are true:

• Its employees receive tips from customers for providing, delivering or serving food or beverages, where tipping is customary. This covers restaurants, bars and food delivery.
• Since tax year 2025, it also covers tips for barbering and hair care, nail care, esthetics, and body and spa treatments, where tipping is customary.
• The employer paid or incurred employer Social Security and Medicare tax on those tips during the tax year.

Service charges are not tips. An automatic gratuity that the business adds to a bill is a service charge, so it does not count (Rev. Rul. 2012-18). At counter-service restaurants where customers tip little, the credit is small, because it applies only to tips that employees actually receive.

How Is the FICA Tip Credit Calculated?

The calculation has three steps, done for each employee and each month:

1. Start with the tips on which you paid employer FICA tax.
2. Subtract the tips used to reach the minimum wage. If the cash wage was below $5.15 an hour, subtract the difference between pay at $5.15 an hour and the cash wages actually paid. Beauty service employers use $7.25. If the cash wage was at or above that rate, subtract nothing.
3. Multiply the rest by 7.65%. For an employee whose wages and tips go over the Social Security wage base, the tips above it get only the 1.45% Medicare rate.

The $5.15 figure is the federal minimum wage on January 1, 2007. The law fixes it at that rate for food and beverage employers. The Social Security wage base is $184,500 for 2026 and $192,300 for 2027; see employer FICA tax.

FICA Tip Credit Example

A full-service restaurant has 15 servers. Each one works 130 hours a month and reports $2,400 in tips a month.

The higher the cash wage, the more of the tips count. At $5.15 an hour or more, every reported tip dollar counts.

This example is an illustration, not a guarantee. Your credit depends on the tips your employees report, their hours and their cash wages.

How Do You Claim the FICA Tip Credit?

• Fill in Form 8846. It takes the total tips, subtracts the tips that are not creditable, and multiplies by 7.65%.
• Carry it to Form 3800. The credit is part of the general business credit. Partnerships and S corporations report it on Schedule K, and their owners claim their share.
• Reduce your deduction. You cannot also deduct the employer FICA tax that the credit covers. Reduce your deduction for employer Social Security and Medicare tax by the credit amount.
• Keep the tip records. Employees report tips to you each month. Keep those reports and your payroll records to support the credit.

You can claim the credit, or elect not to claim it, within 3 years from the due date of your return, on the original return or an amended return.

Is the FICA Tip Credit Refundable?

No. The credit reduces income tax; it does not pay out cash when you owe no tax. If you cannot use all of it in a year, the unused credit can generally be carried back 1 year and forward up to 20 years under Section 39.

Does “No Tax on Tips” Change the FICA Tip Credit?

No. The new deduction for qualified tips is an income tax deduction for employees, for 2025 through 2028. Social Security and Medicare tax still apply to tips, so the employer still pays FICA on them, and the credit still applies.

For what employers must report, see no tax on overtime and tips.

How Does the Tip Credit Fit with a Section 125 Plan?

They work on different parts of payroll:

• The FICA tip credit gives back, as an income tax credit, the employer FICA you pay on tips.
• A Section 125 plan lowers the employer FICA you owe on wages, because employees pay benefit premiums before tax.

A restaurant can use both. Ask your tax advisor how they interact on your payroll. See Section 125 plans for restaurants and estimate your savings.

Frequently Asked Questions

What is the FICA tip credit?

It is a federal income tax credit for the employer share of Social Security and Medicare tax paid on employee tips. It applies to food and beverage businesses and, since 2025, to certain beauty service businesses.

Is the FICA tip credit refundable?

No. It is part of the general business credit, so it reduces income tax. An unused credit can generally be carried back 1 year and forward up to 20 years.

Why does the credit use a $5.15 minimum wage?

For food and beverage employers, the law uses the federal minimum wage in effect on January 1, 2007, which was $5.15 an hour. Beauty service employers use the current federal minimum wage of $7.25.

Which form do you use to claim it?

Form 8846. Partnerships and S corporations file it and pass the credit to their owners. The credit then goes on Form 3800, the general business credit form.

Can you claim the FICA tip credit for past years?

You can claim it, or elect not to claim it, within 3 years from the due date of your return, on the original return or an amended return.

Sources

The rules on this page come from these official sources.

• The credit: 26 U.S.C. § 45B
• How to claim it: IRS Form 8846
• Carryback and carryforward: 26 U.S.C. § 39
• Tips as wages: 26 U.S.C. § 3121(q)
• Tips vs. service charges: IRS Rev. Rul. 2012-18