The FICA tip credit pays restaurants back for part of the payroll tax they owe on tips. When an employee reports tips, you pay the employer share of Social Security and Medicare tax on them, 7.65%. Form 8846 turns most of that tax into a federal income tax credit. The exception is the tips that bring a server’s pay up to $5.15 an hour. On a typical dining room’s tips, the credit can reach five figures a year.
This guide covers who qualifies, which tips count, a worked example, and where the credit goes on your return. It builds on the tip records described in how to set up restaurant books.
What is the FICA tip credit?
The credit is the employer Social Security and Medicare taxes you paid or incurred on employee tips, minus the part tied to tips used to reach the old federal minimum wage. It is section 45B of the tax code, claimed on Form 8846, and part of the general business credit.
It’s a credit, not a deduction, so a $10,000 credit cuts your income tax bill by $10,000. In return, your deduction for employer payroll taxes goes down by the same amount (Form 8846, line 4 instructions).
Who can claim it?
You qualify if both are true (Form 8846, “Who Should File”):
- Your employees received tips from customers for providing, delivering or serving food or beverages, where tipping is customary.
- You paid or incurred employer Social Security and Medicare tax on those tips during the year.
That covers full-service restaurants, bars, cafés, and delivery drivers who are your employees. For tax years beginning after 2024, the credit was also extended to certain beauty service businesses: barbering and hair care, nail care, esthetics, and body and spa treatments.
The tips have to be reported. You only pay FICA on tips employees report to you, so unreported cash tips earn no credit. Employees must report cash tips of $20 or more in a month by the 10th of the next month (IRS tip recordkeeping and reporting).
Which tips don’t count: the $5.15 rule
Food and beverage employers can’t claim the credit on tips used to meet the federal minimum wage in effect on January 1, 2007, which was $5.15 an hour. Note that the test uses $5.15, not today’s $7.25. Each employee is figured month by month:
- Multiply the employee’s hours for the month by $5.15.
- Subtract the wages you actually paid, not counting tips.
- If the result is positive, that many dollars of tips don’t count. If you paid $5.15 an hour or more in cash wages, nothing is excluded.
The IRS example on Form 8846: an employee worked 100 hours in October 2025, received $450 in tips, and was paid $3.75 an hour. At $5.15 they would have earned $515, against $375 actually paid. The $140 difference is excluded, so $310 of the $450 in tips counts toward the credit.
How much is the credit? A worked example
A restaurant’s servers and bartenders report $20,000 in tips in a month. They work 1,600 hours between them, and the restaurant pays the federal tipped cash wage of $2.13 an hour, as many Texas restaurants do. The figures are hypothetical and assume every employee is treated alike; the real calculation runs per employee.
| Step | Calculation | Amount |
|---|---|---|
| Tips reported (Form 8846, line 1) | $20,000 | |
| Wages at $5.15 an hour | 1,600 hours × $5.15 | $8,240 |
| Cash wages actually paid | 1,600 hours × $2.13 | $3,408 |
| Tips not creditable (line 2) | $8,240 − $3,408 | $4,832 |
| Creditable tips (line 3) | $20,000 − $4,832 | $15,168 |
| Credit for the month (line 4) | $15,168 × 7.65% | $1,160 |
| Credit for a year at the same level | $1,160 × 12 | about $13,900 |
Two notes on the math:
- Higher cash wage, bigger credit. If the restaurant paid $5.15 an hour or more before tips, line 2 would be zero and all $20,000 would be creditable: $1,530 a month.
- The wage base rarely matters. If an employee’s wages plus tips go over the Social Security wage base ($176,100 for 2025), only the 1.45% Medicare part counts on the excess. Check the box on line 4 and attach the calculation.
Where does the credit go on your tax return?
| Your business files | Where Form 8846 goes | Who uses the credit |
|---|---|---|
| Form 1120-S (S corporation) | Line 6 to Schedule K; each owner gets a share on Schedule K-1 | Owners, on Form 3800 with their Form 1040 |
| Form 1065 (partnership or multi-member LLC) | Line 6 to Schedule K, then each partner’s K-1 | Partners, on Form 3800 |
| Form 1120 (C corporation) | Form 3800, Part III, line 4f | The corporation |
| Schedule C (sole proprietor or single-member LLC) | Form 3800, Part III, line 4f | You, on your Form 1040 |
Partnerships and S corporations must file Form 8846 to claim the credit. An owner whose only credit comes from a K-1 reports it directly on Form 3800, line 4f, without filing Form 8846 themselves. Form 3800 combines general business credits and limits them to your tax. Unused credit generally carries back one year and forward up to 20 years (Form 3800 instructions).
You can claim the credit, or elect not to, within 3 years of your return’s due date, on the original or an amended return. Restaurants that have never claimed it can often go back three years.
What records do you need?
- Tips reported by employee by month, from payroll. Charged tips from the POS should match what payroll shows.
- Hours and cash wages by employee by month, to run the $5.15 test.
- Proof that FICA was paid on those tips: your Forms 941 and W-2s.
Most payroll systems can produce this. Toast Payroll, for example, has a FICA tip credit report. Clean tip accounts in the books make the credit easy to support. If tips payable never clears to zero, fix that first.
How did the 2025 tip law change things?
The 2025 law known as the One, Big, Beautiful Bill made three changes that touch tips:
- A new deduction for employees. For 2025 through 2028, workers in occupations listed as customarily receiving tips can deduct up to $25,000 of qualified tips. The deduction phases out above $150,000 of modified adjusted gross income ($300,000 for joint filers) (IRS: no tax on tips and overtime). It is an income tax deduction. Tips are still wages for Social Security and Medicare, so the employer FICA you pay, and the credit based on it, don’t change.
- The credit was extended to beauty service businesses for tax years beginning after 2024, as noted above. For them, the test uses $7.25 an hour instead of $5.15.
- New W-2 reporting. Employers report cash tips in box 12 with code TP and the employee’s tipped occupation code in box 14b (IRS tip recordkeeping and reporting). For 2025, the IRS gave penalty relief and made no form changes (Treasury and IRS penalty relief for 2025).
Tip law is still changing. Check the Form 8846 page for developments before you file.
How do you claim it, step by step?
- Pull tips, hours and cash wages by employee for each month of the year from payroll.
- For each employee and month, figure tips not creditable under the $5.15 rule, and total them.
- Complete Form 8846: total tips on line 1, non-creditable tips on line 2, then multiply by 7.65%.
- Reduce your deduction for employer payroll taxes by the credit.
- File Form 8846 with the business return. S corporations and partnerships pass the credit to owners through K-1s; everyone else carries it to Form 3800.
Larger restaurants also file an annual tip return, Form 8027, from the same tip records. For the federal filing dates, see small business tax deadlines for 2027.
Should a CPA claim it for you?
The calculation is mechanical once the records are clean; most of the work is getting tips, hours and wages to agree across the POS, payroll and the books. On the Bookkeeping & Tax plan, we keep those records reconciled every month and claim the credit on the business return. See what our restaurant bookkeeping includes, or book a free call and ask us to check whether past returns left the credit unclaimed.