The FICA Tip Credit
A dollar-for-dollar federal tax credit that gives back the payroll taxes you pay on your employees' tips - one of the most overlooked credits for tipped businesses.
In a nutshell
- You pay 7.65% FICA tax on your employees' reported tips. Section 45B gives most of that back as a dollar-for-dollar credit.
- Only tips above the federal baseline wage count - tips used to reach the baseline are excluded.
- Formula: (Total Tips − Hours × Baseline) × 7.65%.
- Under the 2026 OBBBA expansion, this is no longer just for restaurants - beauty salons and wellness businesses can now claim it, subject to a 15% Gross Receipts test.
- It's claimed on IRS Form 8846.
How it works
When an employee earns tips, you - the employer - owe the 7.65% employer share of Social Security and Medicare (FICA) taxes on those tips, just like regular wages. Section 45B lets you reclaim that tax as a credit against your federal income tax.
There's one important nuance: tips are only creditable to the extent they exceed a baseline hourly wage. Tips that go toward bringing an employee up to that baseline are excluded; everything above it counts.
The formula
Credit = (Total Tips − Hours Worked × Baseline) × 7.65%
Worked example
A server works 1,800 hours and reports $24,000 in tips. At a $5.15 baseline:
- • Baseline wages: 1,800 × $5.15 = $9,270
- • Creditable tips: $24,000 − $9,270 = $14,730
- • Credit: $14,730 × 7.65% = $1,126.85
The 2026 OBBBA expansion
Historically this credit was effectively limited to food & beverage. The One Big Beautiful Bill Act opened it up:
Restaurants & food service
The long-standing credit continues to apply.
Beauty & wellness - newly eligible
Salons, spas, barbershops, and wellness businesses can now claim it, subject to a 15% Gross Receipts test.
The 15% Gross Receipts test
For beauty and wellness businesses, recorded tips must equal at least 15% of gross receipts. If your recorded tips fall below that line, the credit is blocked - which often signals under-reported tips, a genuine audit risk. This is exactly the kind of compliance blind spot P.A.I.D. flags automatically before anything is filed.
Example: $100,000 in gross receipts requires at least $15,000 in recorded tips to pass. Record $10,000 (10%) and the credit is blocked until the discrepancy is resolved.
Who qualifies
- You employ tipped workers and pay FICA tax on their reported tips.
- You're in food & beverage, or - newly - beauty and wellness.
- Beauty/wellness: your recorded tips meet the 15% gross-receipts threshold.
Common mistakes we catch
- Crediting tips below the baseline wage, which aren't eligible.
- Beauty/wellness businesses claiming the credit without passing the 15% test.
- Leaving money on the table by not claiming the credit at all - it's frequently missed.
Do you qualify? The real limits
The bright-line tests and the things that quietly disqualify a business (2026 tax year).
What can disqualify you
- Service charges and auto-gratuities are wages, not tips - never creditable.
- Unreported tips don't count until an IRS §3121(q) notice.
- Tips that only fill the gap up to $5.15/hr generate no credit.
Common reasons businesses get denied
- Counting employer service charges or auto-gratuities as tips - they're wages, not tips.
- Including tips the employee never reported (no §3121(q) notice on file).
- Tips that only bring the worker up to $5.15/hr - those generate no credit.
- Claiming for a business where tipping isn't customary (outside food/beverage and the 2025 beauty/spa expansion).
- Not reducing the FICA-tax deduction by the credit (§280C), which the IRS reverses on exam.
Even if you qualify
- Nonrefundable - limited by your tax liability as part of the General Business Credit (unused: back 1 / forward 20 years).
- You must reduce your FICA-tax deduction by the credit (§280C), unless you elect out.
Check your state
State figures as of June 2026; many are indexed and change mid-year. Confirm with your state labor department and CPA.
Limits that apply to every federal credit
- They're nonrefundable
- Every credit here offsets income tax but can't create a refund (§38 liability limit). A business with little or no tax liability gets little benefit this year - unused amounts carry back 1 year and forward up to 20 (§39).
- Related businesses are combined
- If you own multiple businesses under >50% common control, the IRS treats them as ONE employer for the size tests (§52/§414). Several small entities can together blow past the under-25-FTE, 30-employee, or 100-employee ceilings even though each looks small alone.
- No double-dipping
- The deduction for the wages/premiums/expenses behind a credit is reduced by the credit amount (§280C), and the same dollar can't fund two different credits.
- Pass-through & passive limits
- For S-corps and partnerships the credit flows to owners on a K-1, where each owner's liability and passive-activity limits (§469) decide how much they can actually use.
Plain-English summary, not tax advice. Your CPA confirms eligibility for your specific business.
Want to know what this is worth for your business?
Upload your payroll report - or just enter your tips from your W-3 - and we'll calculate your estimated FICA tip credit, running the 15% test for you automatically.