The FICA Tip Credit (IRS Code Section 45B) is a dollar-for-dollar tax credit that allows eligible businesses to recover the 6.2% employers for the FICA taxes (Social Security and Medicare) paid on employee tips above the federal minimum wage.

The regulations clarify that the credit is available only for employer FICA taxes paid after December 31, 1993, on tips received for services performed after December 31, 1993.

Tip credits generally apply only to qualifying employees working in specific industries who receive more than $30 monthly in tips. The Department of Labor also specifies that employers can only apply tip credits to hours spent performing tip-producing work. When workers split shifts between tipped and non-tipped work, employers are responsible for the full minimum wage for the non-tipped hours.

The FICA Tip Credit is a tax credit available to food and beverage establishments and after 12/31/2024, those in the beauty and personal care industries, that allows them to claim a credit against their federal income taxes for the employer’s share of FICA taxes (Social Security and Medicare taxes) paid on employee tips. The credit specifically applies to tips that exceed the amount needed to bring an employee’s wages up to the federal minimum wage rate of $5.15 per hour (the rate used for this credit).

The Fair Labor Standards Act (FLSA) designed the tip credit to help restaurants, bars, hotels, salons, and other types of businesses that rely on tipped employees to cut payroll costs but tightly controls how they can apply it.  Where a worker’s combined cash wage and gratuity don’t add up to at least the state minimum wage, the employer needs to pay the remainder. Businesses also can’t apply tip credits to service charges, as these are considered part of the business’s income and not the employee’s earned wages

Before this credit existed, only about 15% of tips were even reported. Now, it not only promotes transparency but gives employers like you a chance to recover thousands in overpaid payroll taxes, without changing how you operate.

The credit equals 7.65% of tips reported by your employees that exceed the federal minimum wage. For a restaurant with 20 servers averaging $200 in weekly tips, this can mean over $20,000 per year in tax credits. We can also claim retroactively for up to 3 years, potentially resulting in a substantial refund.

The Department of Labor also specifies that employers can only apply tip credits to hours spent performing tip-producing work

If you own a restaurant, bar, hotel, or any hospitality business where employees receive tips, you’re likely eligible. Starting after 12/31/2024, businesses in the beauty and personal care industries have been added and can file a claim with the 2025 tax return. 

The business must have employees who receive tips that are reported to the IRS, and you must pay FICA taxes on those tips. There is no minimum size requirement—businesses with just a few tipped employees can qualify.

Previously, the federal tip tax was only available if the employee spent at least 80% of their time in tip-producing activities. The 80/20 rule was struck down by the Fifth Circuit Court of Appeals in 2024, removing it as a criterion for businesses. 

The FICA Tip Credit is calculated in several steps:

1. Determine the total tips reported by each employee

2. Calculate what the employee would have earned at $5.15 per hour (hours worked × $5.15)

3. Subtract the actual wages paid from this amount to find tips used to meet minimum wage

4. Subtract the tips used to meet minimum wage from total tips to find eligible tips

5. Multiply eligible tips by 7.65% (the combined Social Security and Medicare tax rate)

The result is the FICA Tip Credit amount, which directly reduces the employer’s income tax liability.

Why is $5.15 used as the minimum wage rate for the FICA Tip Credit when the current federal minimum wage is $7.25?

The $5.15 rate is used because it was the federal minimum wage when the Small Business and Work Opportunity Tax Act of 2007 was enacted. This legislation fixed the minimum wage reference point for the FICA Tip Credit at $5.15 per hour, regardless of subsequent increases in the federal minimum wage. This is beneficial for employers as it means more of the reported tips are eligible for the credit calculation than would be if the current $7.25 minimum wage were used.

Calculating a tip credit involves determining the difference between the applicable minimum wage and the cash wage an employer owes a tipped employee. Under federal law, the minimum wage is $7.25 per hour, while the required cash wage for tipped employees is $2.13. The tip credit therefore works out to $5.12.

Originally, the FICA tip credit was enacted in 1993 with the goal of increasing income and employment tax compliance. With this objective in mind, it was intentionally designed to be a generous credit for employers. While you can’t get a credit for taxes paid on the first $5.15 in earnings per hour, you can get a credit for any FICA taxes you paid for tips earned past the $5.15 mark.

The One Big Beautiful Bill (OBBB) added the Beauty and Personal Care industry to the qualifying businesses for the FICA Tips Tax Credit and established the minimum wage rate for the credit at $7.25 for just these added industries.  Therefore, while you can’t get a credit for taxes paid on the first $7.25 in earnings per hour, you can get a credit for any FICA taxes you paid for tips earned past the $7.25 mark separately for these newly added industries.

Remember: State Laws Can Vary

Tip credit laws vary considerably across the U.S. A hotel in Texas, Utah, or Alabama can follow the federal rule, which means employee tips can count toward up to $5.12 of the required $7.25 minimum wage. At the same time, a bar in Alaska, California, Minnesota, Montana, Nevada, Oregon, or Washington would end up in hot water with the state Department of Labor (DOL) for applying a tip credit.

Other states, like Massachusetts and Illinois, allow businesses to apply a tip credit to wages but require a higher minimum wage. A Boston bellhop must earn a base pay of $6.75 per hour, while a Chicago stylist is entitled to a minimum wage of $9.

No matter what state you live in, you can use the FICA tip tax credit. However, there are state-by-state differences in other tip-related laws that you must be aware of. In many states, the amount you must pay tipped workers is higher than the federal minimum. 

For instance, California doesn’t allow employers to pay less than the state’s minimum wage by counting tips as income. In New York, $5.50 of the employee’s minimum wage earnings per hour can come from tips. This means that the employee can be paid $11 an hour as long as they receive at least $5.50 in tips.

Make sure your business qualifies.

Not all business owners are eligible. Compensate your employees at least the federal minimum wage for all hours worked so that you qualify. If your business is in a state with a higher minimum wage, of course, employees’ wages must meet that standard. Total compensation may include any form of compensation, e.g., hourly wages, tips, service charges, lodging, and meals provided by the business.

Our team handles all these calculations to ensure maximum accuracy and benefit.

Yes, you can claim the FICA tip credit retroactively by filing amended returns for up to 3 years. This means if you’ve never claimed this credit before, you could receive a substantial refund for prior tax years. Our team specializes in maximizing these retroactive claims.

When properly documented, claiming the FICA tip credit does not increase your audit risk. Our process ensures all claims are thoroughly documented and compliant with IRS requirements. We maintain a 100% compliance rate and stand behind every claim we process.

While most firms take months, our streamlined process typically gets you funded within weeks. After you provide the necessary information, our team handles everything, and you can expect to receive your credit in 4-8 weeks in most cases. For retroactive claims, the timeline may be slightly longer.

We need your business tax returns (Form 1120, 1120S, or 1065), payroll reports showing tip income (Form 941), Form 8027 (Employer’s Annual Information Return of Tip Income), and Form 8846 if you’ve previously filed for the credit.

To claim the FICA Tip Credit, employers must file:

- Form 8846: Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips

- Form 3800: General Business Credit (as the FICA Tip Credit is part of the General Business Credit)

These forms must be submitted with the employer’s federal income tax return.

Don’t worry if you don’t have everything—our team will guide you through exactly what’s needed.

We work on a contingency basis—you pay nothing upfront. Our fee is a percentage of the credit we secure for you, so we only get paid when you get your money. If we don’t get you a credit, you pay nothing. This risk-free approach aligns our success with yours.

The FICA tip credit can be claimed alongside other tax incentives like the Work Opportunity Tax Credit (WOTC) and Employee Retention Credit (ERC). However, you cannot claim FICA tip credit on the same wages used for other wage-based credits. Our tax specialists will optimize your overall tax strategy to maximize all available credits.

Yes, when claiming the FICA tip credit, you must reduce your wage deduction by the amount of the credit claimed. However, this is still highly advantageous as a dollar-for-dollar tax credit provides more benefit than a deduction. Our analysis will show you the net benefit specific to your tax situation.

The FICA tip credit is based on reported tips only. We can help implement tip reporting best practices to ensure you’re maximizing your credit while maintaining compliance. Improving tip reporting benefits both your business (through increased tax credits) and your employees (through increased Social Security benefits).

Certain large food or beverage establishments (U.S. restaurants that employ 10 or more servers on a typical day and serve meals on-premises) are required to report to the IRS the total amount of tips that employees reported to them. If that number fails to exceed 8% of an establishment’s gross food and beverage receipts, the law deems that employees have underreported their tips. If this situation is uncovered by the IRS, it’s likely that a recalculation of tip income would be required for at least some employees. Such a recalculation would also have an effect on the employer’s FICA tip credit for the year.

Conditions and caveats like these can add complexity to what might otherwise seem like a straightforward calculation.

These are two entirely different concepts:

- FICA Tip Credit: A tax credit that reduces the employer’s income tax liability based on FICA taxes paid on employee tips.

- Minimum Wage Tip Credit: Allows employers to pay tipped employees a lower direct wage (as low as $2.13 federally) and count their tips toward satisfying minimum wage requirements.

The FICA Tip Credit affects tax liability, while the Minimum Wage Tip Credit affects payroll obligations. They are unrelated provisions that happen to both involve tips.

No, automatic service charges (such as mandatory gratuities for large parties) are not considered tips for purposes of the FICA Tip Credit. To qualify as a tip, a payment must meet four criteria:

1. The payment must be made free from compulsion

2. The customer must have the unrestricted right to determine the amount

3. The payment cannot be subject to negotiation or dictated by employer policy

4. The customer must have the right to determine who receives the payment

Since automatic service charges don’t meet these criteria, they’re treated as regular wages, not tips, and don’t qualify for the FICA Tip Credit.

The FICA Tip Credit is part of the General Business Credit. If you can’t use the full credit in the current tax year (for example, if it exceeds your tax liability), the unused portion can be carried back one year and carried forward for up to 20 years until it is used up. This makes the credit valuable even for businesses with fluctuating profitability.

No, unlike the Minimum Wage Tip Credit (which requires employee notification), the FICA Tip Credit does not require any notification to employees. It’s strictly a tax matter between the employer and the IRS. However, it’s still important to ensure employees are properly reporting all their tips, as this impacts the credit amount.

Tip pooling doesn’t directly affect the eligibility for the FICA Tip Credit, but it does impact how you calculate it. When tips are pooled and redistributed, you should calculate the credit based on the final amount of tips each employee receives after the pool distribution, not the initial tips received. Proper documentation of the tip pooling arrangement and the final distribution to each employee is important for accurate credit calculation.

No, you cannot double-benefit by both deducting the FICA taxes and claiming them as a credit. When you claim the FICA Tip Credit, you must reduce your deduction for FICA taxes by the amount of the credit claimed. This prevents a double tax benefit for the same expense.

You should maintain detailed records, including:

- Employee tip reports showing all tips received

- Payroll records showing hours worked and wages paid to each employee

- FICA tax payment records

- Calculations used to determine the credit amount for each employee

- Documentation of any tip pooling arrangements

- Copies of filed Forms 8846 and 3800

These records should be kept for at least three years from the date the tax return was filed or two years from the date the tax was paid, whichever is later.

Yes, the credit applies to FICA taxes paid on eligible tips received by any employee in a food or beverage establishment, not just servers. This includes bartenders, bussers, hosts, and other staff who receive tips directly or through tip-sharing arrangements. However, each employee’s tips must be calculated separately to determine the eligible amount for the credit.

No. Salon booth renters and independent contractors are self-employed and already pay their own Social Security
and Medicare taxes through self-employment tax. As independent business owners, they have the ability to
deduct their share of these taxes on their personal returns, which is not available to employers of tipped
employees.  Therefore, the FICA Tips Tax Credit does not apply to self-employed independent contractors.

No. Employee benefits are based on their total wages and tips reported. This credit does not affect the employees’ share of taxes or their benefit calculations.

No, the FICA tip credit is a non-refundable general business tax credit for employers. This means it can reduce an employer’s income tax liability to zero, but it will not generate a tax refund if the credit amount exceeds the tax owed. 

Key Points about the FICA Tip Credit:

Non-refundable: The primary function of the credit is to offset an employer’s existing tax bill. If the credit amount is greater than the tax liability, the employer does not receive the difference back as a cash refund.

Carryback and Carryforward provisions: Unused portions of the credit can be applied to past tax liabilities (carried back one year) or future tax liabilities (carried forward for up to 20 years). This allows businesses to maximize the value of the credit over time, even if they don’t have enough tax liability in the current year to use it all at once.

The $5.15 rate is used because it was the federal minimum wage when the Small Business and Work Opportunity Tax Act of 2007 was enacted. This legislation fixed the minimum wage reference point for the FICA Tip Credit at $5.15 per hour, regardless of subsequent increases in the federal minimum wage. This is beneficial for employers as it means more of the reported tips are eligible for the credit calculation than would be if the current $7.25 minimum wage were used.

If the qualifying business a pass-through entity (S-corporation or Partnership) for income tax purposes, the credit is reported on each partner/shareholder’s schedule K-1 and flows through to their personal tax returns on Form 3800. The credit is tracked on the corporation’s tax return on Form 3800 if the qualifying business is structured as a C-corporation for income tax purposes.

To qualify as a “tip,” the payment from the customer to the employee must meet four conditions:

- A customer can’t be compelled to pay it.

- The customer must have the unrestricted right to determine the amount.

- The payment can’t be subject to negotiation or dictated by employer policy.

- The customer must have the right to determine who receives the payment.

For instance, a service charge applied to a bill for large parties or catering events that’s then shared among the servers (waiter(s), busser(s), bartender(s)) will generally not qualify as a tip that can be included in the creditable tip calculation.

Example A: Restaurant W’s menu specifies that an 18% charge will be added to all bills for parties of 6 or more customers. Customer D’s bill for food and beverages for her party of 8 includes an amount on the “tip line” equal to 18% of the price for food and beverages and the total includes this amount. Restaurant W distributes this amount to the waitresses and bussers. Under these circumstances, Customer D did not have the unrestricted right to determine the amount of the payment because it was dictated by employer policy. Customer D did not make the payment free from compulsion. The 18% charge is not a tip within the meaning of section 3121 of the Code. The amount included on the tip line is a service charge dictated by Restaurant W.

Example B: Restaurant X includes sample calculations of tip amounts beneath the signature line on its charge receipts for food and beverages provided to customers. The actual tip line is left blank. Customer G’s charge receipt shows sample tip calculations of 15%, 18% and 20% of the price of food and beverages. Customer G inserts the amount calculated at 15% on the tip line and adds this amount to the price of food and beverages to compute the total. Under these circumstances, Customer G was free to enter any amount on the tip line or leave it blank; thus, Customer G entered the 15% amount free from compulsion. Customer G and Restaurant X did not negotiate the amount nor did Restaurant X dictate the amount. Customer G generally determined who would get the amount. The amount Customer G entered on the tip line is a tip within the meaning of section 3121 of the Code.

The following restaurants may not utilize the tipped minimum wage or tip credit:

- Quick-service restaurants

- Restaurants in jurisdictions or states that don’t allow a tip credit (i.e., Alaska, California, District of Columbia, Minnesota, Montana, Nevada, Oregon, and Washington. 

- Restaurants that have implemented service charges instead of tips.

If you don’t utilize the tip credit when paying employees, the entire portion of tips paid to the employees qualifies for the credit. For example, if you charge your customers a 20% service charge and pay your employees a wage over the regular minimum wage (instead of tipped minimum wage) of $7.25/hour, you can claim a credit for the payroll tax paid on all the tips. Restaurants following this model will not benefit nearly as much from the FICA tip credit as those that utilize the tip credit.

Alaska

As of July 1, 2025, Alaska’s minimum wage is $13.00 per hour, an increase from the previous rate, with future adjustments tied to inflation, ensuring it stays above the federal minimum wage.

California

The California’s statewide minimum wage is currently $16.50/hour but will increase to $16.90/hour on January 1, 2026. However, many cities, counties, and specific industries (like fast-food workers at $20/hour) have higher local minimums.. 

District of Columbia

The minimum wage in the District of Columbia is $17.95 per hour, effective July 1, 2025, and this rate applies to all workers regardless of employer size, with future increases tied to the Consumer Price Index (CPI). 

Minnesota

As of January 1, 2026, Minnesota’s statewide minimum wage increases to $11.41 per hour for all employers, up from $11.13 in 2025, due to annual inflation adjustments. A 90-day training wage for employees under 20 also rose to $9.31/hour. Note that Minneapolis and St. Paul have higher local minimums, with Minneapolis reaching $16.37 in 2026.  In St. Paul, MN, minimum wages vary by business size, with large businesses (101+ employees) at $15.97/hour (since Jan 1, 2025), small businesses (6-100 employees) at $15.00/hour (since July 1, 2025), and micro businesses (≤5 employees) at $13.25/hour (also since July 1, 2025), according to the official City of Saint Paul website

Montana

Montana’s minimum wage is $10.55 per hour for most businesses, but a lower rate of $4.00 per hour applies to very small businesses (under $110k sales) not covered by federal law; however, employees must get the higher of federal or state minimum if under federal FLSA, and a bill (HB484) aims to raise the standard rate to $12.06 starting July 1, 2025, removing the small business exception.

 Key Details:

- Standard Rate (2025): $10.55/hour.

- Small Business Exception: $4.00/hour for businesses with under $110,000 in gross annual sales, but only if not covered by federal law.

- Federal Minimum Wage: The federal rate ($7.25/hour) applies if it’s higher than Montana’s rate for certain employees.

- Upcoming Change (July 1, 2025): HB484 proposes increasing the rate to $12.06/hour and eliminating the $4 rate for all businesses. 

Nevada

As of July 1, 2024, the minimum wage in Nevada is a flat $12.00 per hour for all employers, ending the previous tiered system based on health benefits; this rate is set to continue, as voters approved measures that increased it to this level and ended further automatic adjustments, though it’s subject to review based on cost of living. 

Key Details:

Standard Rate: $12.00/hour. 

· Effective Since: July 1, 2024. 

· Tiered System Ended: The previous two-tiered system (with a lower rate for employers offering health benefits) was eliminated by voters. 

· Overtime: Employees earning less than 1.5 times the minimum wage must receive overtime pay (1.5x their rate) for hours over 8 in a day or 40 in a week, notes the Nevada Department of Labor. 

· Meal/Rest Breaks: Nevada law mandates paid 10-minute breaks for every 4 hours worked and an unpaid 30-minute meal break for every 8 hours worked, according to the Nevada Department of Labor. 

Oregon

Oregon has a tiered minimum wage system with three rates as of July 1, 2025: $16.30/hour for the Portland Metro area, $15.05/hour for the Standard rate, and $14.05/hour for Non-urban counties, with rates adjusting annually based on inflation after 2026. These rates are set by the Bureau of Labor and Industries (BOLI) and apply to most workers, with special rules for tipped employees.

Current Oregon Minimum Wages (Effective July 1, 2025 – June 30, 2026) 

- Portland Metro: $16.30 per hour

- Standard: $15.05 per hour

- Nonurban: $14.05 per hour

Key Points 

- Tiered System: Oregon distinguishes between urban, metro, and rural areas for wage setting.

- Annual Adjustments: Rates are adjusted yearly based on the Consumer Price Index (CPI), starting July 1, 2026, for the standard and nonurban rates.

- Official Source: The Bureau of Labor and Industries (BOLI) provides official information.

Washington

Washington’s state minimum wage will increase to $17.13 per hour starting January 1, 2026, up from $16.66 in 2025, based on cost-of-living adjustments, but some cities and counties like Renton and King County have even higher local minimums. Minor employees (ages 14-15) earn a slightly lower rate, and agricultural workers may also have exceptions, with the general rule being that the highest applicable wage (state, local, or federal) must be paid.  

Key Figures & Dates: 

- Effective Jan 1, 2026: $17.13/hour (Standard)

- Effective Jan 1, 2026: $14.56/hour (Youth 14-15)

- Current (2025): $16.66/hour

Important Considerations:

- Local Wages: Cities like Renton and areas in King County have higher rates than the state minimum. 

- Indexation: The state rate adjusts annually in January based on inflation (CPI-W). 

- Employer Responsibility: Employers must pay the highest applicable wage (state, local, or federal) for all hours worked, including training and meetings, according to the state’s Department of Labor & Industries. 

No problem! Each owner will need to create an account, upload their personal taxes, and sign an agreement. Only the original owner will need to upload the business documentation.

No problem!  Our accounting team creates and files business amendments for each year you are eligible. The IRS will amend your taxes for the years you qualify and issue a refund check. 

Great, you still qualify! The credit only excludes tips used to meet the old federal minimum wage of $5.15/hour. Anything above that still counts.

All cash tips received by an employee are wages for FICA tax purposes and, therefore, must be reported to the employer unless the cash tips received by the employee during a single calendar month while working for the employer total less than $20. If an employee works for more than one employer during a month and receives less than $20 in tips while working for each employer, no tips are required to be reported to any of the employers. Cash tips include tips received from customers, charged tips (e.g., credit and debit card charges) distributed to the employee by his or her employer, and tips received from other employees under any tip-sharing arrangement. Thus, both directly and indirectly tipped employees must report tips received to their employer. Non-cash tips (i.e., tips received by an employee in any other medium than cash, such as passes, tickets, or other goods or commodities) from customers are not wages for FICA tax purposes and are not reported to the employer. All cash tips and non-cash tips are includable in an employee’s gross income and subject to federal income taxes.

If an employee fails to report tips to his or her employer, the employer is not liable for the employer share of FICA taxes on the unreported tips until notice and demand for the taxes is made to the employer by the Service. The employer is not liable to withhold and pay the employee share of FICA taxes on the unreported tips.

If the Service determines that an employer’s employees have unreported tips and issues a Section 3121(q) Notice and Demand to the employer, the Service must assess the employer FICA taxes on the unreported tips within 3 years after April 15 of the calendar year following the year in which the Section 3121(q) Notice and Demand is made. For example, if the notice and demand is dated December 31, 2012, the liability is required to be reported on Form 941 for the fourth quarter of 2012, due on January 31, 2013. If the employer timely files Form 941, the period of limitations for assessment ends on April 15, 2016.

No, these two programs, while sharing the same goal (encouraging employees to report their tips as taxable income), are mutually exclusive.  The fact that employees are reducing their taxable income on their personal returns does not preclude the business owner from claiming the FICA Tip Credit. 

Yes, there’s an important new requirement for the FICA Tips Tax Credit as it relates to the Beauty and Personal Care industry; tips income must exceed 15% of gross receipts for those services in a calendar year to qualify for the credit. If tips fall below that threshold, the credit doesn’t apply.

The FICA Tip Credit (IRS Code Section 45B) is a dollar-for-dollar tax credit that allows eligible businesses to recover the 6.2% employers for the FICA taxes (Social Security and Medicare) paid on employee tips above the federal minimum wage.

The regulations clarify that the credit is available only for employer FICA taxes paid after December 31, 1993, on tips received for services performed after December 31, 1993.

This is not a deduction—it directly reduces your tax liability, providing immediate cash flow benefits to your business.

The FICA Tip Credit is a tax credit available to food and beverage establishments and after 12/31/2024, those in the beauty and personal care industries, that allows them to claim a credit against their federal income taxes for the employer’s share of FICA taxes (Social Security and Medicare taxes) paid on employee tips. The credit specifically applies to tips that exceed the amount needed to bring an employee’s wages up to the federal minimum wage rate of $5.15 per hour (the rate used for this credit).

Before this credit existed, only about 15% of tips were even reported. Now, it not only promotes transparency but gives employers like you a chance to recover thousands in overpaid payroll taxes, without changing how you operate.

The credit equals 7.65% of tips reported by your employees that exceed the federal minimum wage. For a restaurant with 20 servers averaging $200 in weekly tips, this can mean over $20,000 per year in tax credits. We can also claim retroactively for up to 3 years, potentially resulting in a substantial refund.

If you own a restaurant, bar, hotel, or any hospitality business where employees receive tips, you’re likely eligible. Starting after 12/31/2024, businesses in the beauty and personal care industries have been added and can file a claim with the 2025 tax return. 

The business must have employees who receive tips that are reported to the IRS, and you must pay FICA taxes on those tips. There is no minimum size requirement—businesses with just a few tipped employees can qualify.

Previously, the federal tip tax was only available if the employee spent at least 80% of their time in tip-producing activities. The 80/20 rule was struck down by the Fifth Circuit Court of Appeals in 2024, removing it as a criterion for businesses. 

The FICA Tip Credit is calculated in several steps:

1. Determine the total tips reported by each employee

2. Calculate what the employee would have earned at $5.15 per hour (hours worked × $5.15)

3. Subtract the actual wages paid from this amount to find tips used to meet minimum wage

4. Subtract the tips used to meet minimum wage from total tips to find eligible tips

5. Multiply eligible tips by 7.65% (the combined Social Security and Medicare tax rate)

The result is the FICA Tip Credit amount, which directly reduces the employer’s income tax liability.

Why is $5.15 used as the minimum wage rate for the FICA Tip Credit when the current federal minimum wage is $7.25?

The $5.15 rate is used because it was the federal minimum wage when the Small Business and Work Opportunity Tax Act of 2007 was enacted. This legislation fixed the minimum wage reference point for the FICA Tip Credit at $5.15 per hour, regardless of subsequent increases in the federal minimum wage. This is beneficial for employers as it means more of the reported tips are eligible for the credit calculation than would be if the current $7.25 minimum wage were used.

Originally, the FICA tip credit was enacted in 1993 with the goal of increasing income and employment tax compliance. With this objective in mind, it was intentionally designed to be a generous credit for employers. While you can’t get a credit for taxes paid on the first $5.15 in earnings per hour, you can get a credit for any FICA taxes you paid for tips earned past the $5.15 mark.

Remember: State Laws Can Vary

No matter what state you live in, you can use the FICA tip tax credit. However, there are state-by-state differences in other tip-related laws that you must be aware of. In many states, the amount you must pay tipped workers is higher than the federal minimum. 

For instance, California doesn’t allow employers to pay less than the state’s minimum wage by counting tips as income. In New York, $5.50 of the employee’s minimum wage earnings per hour can come from tips. This means that the employee can be paid $11 an hour as long as they receive at least $5.50 in tips.

Make sure your business qualifies.

Not all business owners are eligible. Compensate your employees at least the federal minimum wage for all hours worked so that you qualify. If your business is in a state with a higher minimum wage, of course, employees’ wages must meet that standard. Total compensation may include any form of compensation, e.g., hourly wages, tips, service charges, lodging, and meals provided by the business.

Our team handles all these calculations to ensure maximum accuracy and benefit.

Yes, you can claim the FICA tip credit retroactively by filing amended returns for up to 3 years. This means if you’ve never claimed this credit before, you could receive a substantial refund for prior tax years. Our team specializes in maximizing these retroactive claims.

When properly documented, claiming the FICA tip credit does not increase your audit risk. Our process ensures all claims are thoroughly documented and compliant with IRS requirements. We maintain a 100% compliance rate and stand behind every claim we process.

While most firms take months, our streamlined process typically gets you funded within weeks. After you provide the necessary information, our team handles everything, and you can expect to receive your credit in 4-8 weeks in most cases. For retroactive claims, the timeline may be slightly longer.

We need your business tax returns (Form 1120, 1120S, or 1065), payroll reports showing tip income (Form 941), Form 8027 (Employer’s Annual Information Return of Tip Income), and Form 8846 if you’ve previously filed for the credit.

To claim the FICA Tip Credit, employers must file:

- Form 8846: Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips

- Form 3800: General Business Credit (as the FICA Tip Credit is part of the General Business Credit)

These forms must be submitted with the employer’s federal income tax return.

Don’t worry if you don’t have everything—our team will guide you through exactly what’s needed.

We work on a contingency basis—you pay nothing upfront. Our fee is a percentage of the credit we secure for you, so we only get paid when you get your money. If we don’t get you a credit, you pay nothing. This risk-free approach aligns our success with yours.

The FICA tip credit can be claimed alongside other tax incentives like the Work Opportunity Tax Credit (WOTC) and Employee Retention Credit (ERC). However, you cannot claim FICA tip credit on the same wages used for other wage-based credits. Our tax specialists will optimize your overall tax strategy to maximize all available credits.

Yes, when claiming the FICA tip credit, you must reduce your wage deduction by the amount of the credit claimed. However, this is still highly advantageous as a dollar-for-dollar tax credit provides more benefit than a deduction. Our analysis will show you the net benefit specific to your tax situation.

The FICA tip credit is based on reported tips only. We can help implement tip reporting best practices to ensure you’re maximizing your credit while maintaining compliance. Improving tip reporting benefits both your business (through increased tax credits) and your employees (through increased Social Security benefits).

Certain large food or beverage establishments (U.S. restaurants that employ 10 or more servers on a typical day and serve meals on-premises) are required to report to the IRS the total amount of tips that employees reported to them. If that number fails to exceed 8% of an establishment’s gross food and beverage receipts, the law deems that employees have underreported their tips. If this situation is uncovered by the IRS, it’s likely that a recalculation of tip income would be required for at least some employees. Such a recalculation would also have an effect on the employer’s FICA tip credit for the year.

Conditions and caveats like these can add complexity to what might otherwise seem like a straightforward calculation.

These are two entirely different concepts:

- FICA Tip Credit: A tax credit that reduces the employer’s income tax liability based on FICA taxes paid on employee tips.

- Minimum Wage Tip Credit: Allows employers to pay tipped employees a lower direct wage (as low as $2.13 federally) and count their tips toward satisfying minimum wage requirements.

The FICA Tip Credit affects tax liability, while the Minimum Wage Tip Credit affects payroll obligations. They are unrelated provisions that happen to both involve tips.

No, automatic service charges (such as mandatory gratuities for large parties) are not considered tips for purposes of the FICA Tip Credit. To qualify as a tip, a payment must meet four criteria:

1. The payment must be made free from compulsion

2. The customer must have the unrestricted right to determine the amount

3. The payment cannot be subject to negotiation or dictated by employer policy

4. The customer must have the right to determine who receives the payment

Since automatic service charges don’t meet these criteria, they’re treated as regular wages, not tips, and don’t qualify for the FICA Tip Credit.

The FICA Tip Credit is part of the General Business Credit. If you can’t use the full credit in the current tax year (for example, if it exceeds your tax liability), the unused portion can be carried back one year and carried forward for up to 20 years until it is used up. This makes the credit valuable even for businesses with fluctuating profitability.

No, unlike the Minimum Wage Tip Credit (which requires employee notification), the FICA Tip Credit does not require any notification to employees. It’s strictly a tax matter between the employer and the IRS. However, it’s still important to ensure employees are properly reporting all their tips, as this impacts the credit amount.

Tip pooling doesn’t directly affect the eligibility for the FICA Tip Credit, but it does impact how you calculate it. When tips are pooled and redistributed, you should calculate the credit based on the final amount of tips each employee receives after the pool distribution, not the initial tips received. Proper documentation of the tip pooling arrangement and the final distribution to each employee is important for accurate credit calculation.

Tip pooling is a system where tips from all employees are combined into a single ‘pot’ and redistributed according to a preset formula based on hours worked or roles performed. Many businesses, including restaurants, bars, salons, hotels, and valet services, use tip pooling to create fairness among employees who contribute to the customer experience but may not receive direct tips.

Example: Emily works as a stylist at a salon alongside Lucia, the shampoo assistant, and Lisa, the receptionist. Clients often tip Emily directly, but Lucia, who preps clients and washes hair, rarely receives a tip. Lisa schedules appointments and coordinates product deliveries to ensure the salon runs smoothly. The salon applies a tip pool to distribute gratuities across all three employees in recognition of their value to the business. 

The FSLA allows tip pooling, but only under specific circumstances. Supervisors and managers cannot participate in a tip pool, and employers are expressly prohibited from claiming any of the tip pool money or diverting it to non-tipped staff. All tips collected must be fully distributed on the regular payday for the workweek. If an employer can’t work out the distribution beforehand, those tips need to be paid as soon as possible in the new pay period.

Some state minimum wage laws don’t allow employers to implement tip pooling unless all workers receive the full federal minimum wage without a tip credit. Federal law likewise doesn’t allow traditionally non-tipped employees to participate in tip pools unless the employer pays everyone the full minimum wage. 

Employees must be notified of the tip pooling arrangement at the time of hire, including how much they’ll need to contribute and the formula for calculating distribution.

No, you cannot double-benefit by both deducting the FICA taxes and claiming them as a credit. When you claim the FICA Tip Credit, you must reduce your deduction for FICA taxes by the amount of the credit claimed. This prevents a double tax benefit for the same expense.

You should maintain detailed records, including:

- Employee tip reports showing all tips received

- Payroll records showing hours worked and wages paid to each employee

- FICA tax payment records

- Calculations used to determine the credit amount for each employee

- Documentation of any tip pooling arrangements

- Copies of filed Forms 8846 and 3800

These records should be kept for at least three years from the date the tax return was filed or two years from the date the tax was paid, whichever is later.

Yes, the credit applies to FICA taxes paid on eligible tips received by any employee in a food or beverage establishment, not just servers. This includes bartenders, bussers, hosts, and other staff who receive tips directly or through tip-sharing arrangements. However, each employee’s tips must be calculated separately to determine the eligible amount for the credit.

No. Salon booth renters and independent contractors are self-employed and already pay their own Social Security
and Medicare taxes through self-employment tax. As independent business owners, they have the ability to
deduct their share of these taxes on their personal returns, which is not available to employers of tipped
employees.  Therefore, the FICA Tips Tax Credit does not apply to self-employed independent contractors.

No. Employee benefits are based on their total wages and tips reported. This credit does not affect the employees’ share of taxes or their benefit calculations.

No, the FICA tip credit is a non-refundable general business tax credit for employers. This means it can reduce an employer’s income tax liability to zero, but it will not generate a tax refund if the credit amount exceeds the tax owed. 

Key Points about the FICA Tip Credit:

- Non-refundable: The primary function of the credit is to offset an employer’s existing tax bill. If the credit amount is greater than the tax liability, the employer does not receive the difference back as a cash refund.

- Carryback and Carryforward provisions: Unused portions of the credit can be applied to past tax liabilities (carried back one year) or future tax liabilities (carried forward for up to 20 years). This allows businesses to maximize the value of the credit over time, even if they don’t have enough tax liability in the current year to use it all at once.

The $5.15 rate is used because it was the federal minimum wage when the Small Business and Work Opportunity Tax Act of 2007 was enacted. This legislation fixed the minimum wage reference point for the FICA Tip Credit at $5.15 per hour, regardless of subsequent increases in the federal minimum wage. This is beneficial for employers as it means more of the reported tips are eligible for the credit calculation than would be if the current $7.25 minimum wage were used.

If the qualifying business a pass-through entity (S-corporation or Partnership) for income tax purposes, the credit is reported on each partner/shareholder’s schedule K-1 and flows through to their personal tax returns on Form 3800. The credit is tracked on the corporation’s tax return on Form 3800 if the qualifying business is structured as a C-corporation for income tax purposes.

To qualify as a “tip,” the payment from the customer to the employee must meet four conditions:

- A customer can’t be compelled to pay it.

- The customer must have the unrestricted right to determine the amount.

- The payment can’t be subject to negotiation or dictated by employer policy.

- The customer must have the right to determine who receives the payment.

For instance, a service charge applied to a bill for large parties or catering events that’s then shared among the servers (waiter(s), busser(s), bartender(s)) will generally not qualify as a tip that can be included in the creditable tip calculation.

Example A: Restaurant W’s menu specifies that an 18% charge will be added to all bills for parties of 6 or more customers. Customer D’s bill for food and beverages for her party of 8 includes an amount on the “tip line” equal to 18% of the price for food and beverages and the total includes this amount. Restaurant W distributes this amount to the waitresses and bussers. Under these circumstances, Customer D did not have the unrestricted right to determine the amount of the payment because it was dictated by employer policy. Customer D did not make the payment free from compulsion. The 18% charge is not a tip within the meaning of section 3121 of the Code. The amount included on the tip line is a service charge dictated by Restaurant W.

Example B: Restaurant X includes sample calculations of tip amounts beneath the signature line on its charge receipts for food and beverages provided to customers. The actual tip line is left blank. Customer G’s charge receipt shows sample tip calculations of 15%, 18% and 20% of the price of food and beverages. Customer G inserts the amount calculated at 15% on the tip line and adds this amount to the price of food and beverages to compute the total. Under these circumstances, Customer G was free to enter any amount on the tip line or leave it blank; thus, Customer G entered the 15% amount free from compulsion. Customer G and Restaurant X did not negotiate the amount nor did Restaurant X dictate the amount. Customer G generally determined who would get the amount. The amount Customer G entered on the tip line is a tip within the meaning of section 3121 of the Code.

The following restaurants may not utilize the tipped minimum wage or tip credit:

- Quick-service restaurants

- Restaurants in jurisdictions or states that don’t allow a tip credit (i.e., Alaska, California, District of Columbia, Minnesota, Montana, Nevada, Oregon, and Washington. 

- Restaurants that have implemented service charges instead of tips.

If you don’t utilize the tip credit when paying employees, the entire portion of tips paid to the employees qualifies for the credit. For example, if you charge your customers a 20% service charge and pay your employees a wage over the regular minimum wage (instead of tipped minimum wage) of $7.25/hour, you can claim a credit for the payroll tax paid on all the tips. Restaurants following this model will not benefit nearly as much from the FICA tip credit as those that utilize the tip credit.

Alaska

As of July 1, 2025, Alaska’s minimum wage is $13.00 per hour, an increase from the previous rate, with future adjustments tied to inflation, ensuring it stays above the federal minimum wage.

California

The California’s statewide minimum wage is currently $16.50/hour but will increase to $16.90/hour on January 1, 2026. However, many cities, counties, and specific industries (like fast-food workers at $20/hour) have higher local minimums.. 

District of Columbia

The minimum wage in the District of Columbia is $17.95 per hour, effective July 1, 2025, and this rate applies to all workers regardless of employer size, with future increases tied to the Consumer Price Index (CPI). 

Minnesota

As of January 1, 2026, Minnesota’s statewide minimum wage increases to $11.41 per hour for all employers, up from $11.13 in 2025, due to annual inflation adjustments. A 90-day training wage for employees under 20 also rose to $9.31/hour. Note that Minneapolis and St. Paul have higher local minimums, with Minneapolis reaching $16.37 in 2026.  In St. Paul, MN, minimum wages vary by business size, with large businesses (101+ employees) at $15.97/hour (since Jan 1, 2025), small businesses (6-100 employees) at $15.00/hour (since July 1, 2025), and micro businesses (≤5 employees) at $13.25/hour (also since July 1, 2025), according to the official City of Saint Paul website

Montana

Montana’s minimum wage is $10.55 per hour for most businesses, but a lower rate of $4.00 per hour applies to very small businesses (under $110k sales) not covered by federal law; however, employees must get the higher of federal or state minimum if under federal FLSA, and a bill (HB484) aims to raise the standard rate to $12.06 starting July 1, 2025, removing the small business exception.

Key Details:

- Standard Rate (2025): $10.55/hour.

- Small Business Exception: $4.00/hour for businesses with under $110,000 in gross annual sales, but only if not covered by federal law.

- Federal Minimum Wage: The federal rate ($7.25/hour) applies if it’s higher than Montana’s rate for certain employees.

- Upcoming Change (July 1, 2025): HB484 proposes increasing the rate to $12.06/hour and eliminating the $4 rate for all businesses. 

Nevada

As of July 1, 2024, the minimum wage in Nevada is a flat $12.00 per hour for all employers, ending the previous tiered system based on health benefits; this rate is set to continue, as voters approved measures that increased it to this level and ended further automatic adjustments, though it’s subject to review based on cost of living. 

Key Details

- Standard Rate: $12.00/hour. 

- Effective Since: July 1, 2024. 

- Tiered System Ended: The previous two-tiered system (with a lower rate for employers offering health benefits) was eliminated by voters. 

- Overtime: Employees earning less than 1.5 times the minimum wage must receive overtime pay (1.5x their rate) for hours over 8 in a day or 40 in a week, notes the Nevada Department of Labor. 

· Meal/Rest Breaks: Nevada law mandates paid 10-minute breaks for every 4 hours worked and an unpaid 30-minute meal break for every 8 hours worked, according to the Nevada Department of Labor. 

Oregon

Oregon has a tiered minimum wage system with three rates as of July 1, 2025: $16.30/hour for the Portland Metro area, $15.05/hour for the Standard rate, and $14.05/hour for Non-urban counties, with rates adjusting annually based on inflation after 2026. These rates are set by the Bureau of Labor and Industries (BOLI) and apply to most workers, with special rules for tipped employees.

Current Oregon Minimum Wages (Effective July 1, 2025 – June 30, 2026) 

- Portland Metro: $16.30 per hour

- Standard: $15.05 per hour

- Nonurban: $14.05 per hour

Key Points 

- Tiered System: Oregon distinguishes between urban, metro, and rural areas for wage setting.

- Annual Adjustments: Rates are adjusted yearly based on the Consumer Price Index (CPI), starting July 1, 2026, for the standard and nonurban rates.

- Official Source: The Bureau of Labor and Industries (BOLI) provides official information.

Washington

Washington’s state minimum wage will increase to $17.13 per hour starting January 1, 2026, up from $16.66 in 2025, based on cost-of-living adjustments, but some cities and counties like Renton and King County have even higher local minimums. Minor employees (ages 14-15) earn a slightly lower rate, and agricultural workers may also have exceptions, with the general rule being that the highest applicable wage (state, local, or federal) must be paid.  

Key Figures & Dates: 

- Effective Jan 1, 2026: $17.13/hour (Standard)

- Effective Jan 1, 2026: $14.56/hour (Youth 14-15)

- Current (2025): $16.66/hour

Important Considerations:

- Local Wages: Cities like Renton and areas in King County have higher rates than the state minimum. 

- Indexation: The state rate adjusts annually in January based on inflation (CPI-W). 

- Employer Responsibility: Employers must pay the highest applicable wage (state, local, or federal) for all hours worked, including training and meetings, according to the state’s Department of Labor & Industries. 

No problem! Each owner will need to create an account, upload their personal taxes, and sign an agreement. Only the original owner will need to upload the business documentation.

No problem!  Our accounting team creates and files business amendments for each year you are eligible. The IRS will amend your taxes for the years you qualify and issue a refund check. 

Great, you still qualify! The credit only excludes tips used to meet the old federal minimum wage of $5.15/hour. Anything above that still counts.

All cash tips received by an employee are wages for FICA tax purposes and, therefore, must be reported to the employer unless the cash tips received by the employee during a single calendar month while working for the employer total less than $20. If an employee works for more than one employer during a month and receives less than $20 in tips while working for each employer, no tips are required to be reported to any of the employers. Cash tips include tips received from customers, charged tips (e.g., credit and debit card charges) distributed to the employee by his or her employer, and tips received from other employees under any tip-sharing arrangement. Thus, both directly and indirectly tipped employees must report tips received to their employer. Non-cash tips (i.e., tips received by an employee in any other medium than cash, such as passes, tickets, or other goods or commodities) from customers are not wages for FICA tax purposes and are not reported to the employer. All cash tips and non-cash tips are includable in an employee’s gross income and subject to federal income taxes.

If an employee fails to report tips to his or her employer, the employer is not liable for the employer share of FICA taxes on the unreported tips until notice and demand for the taxes is made to the employer by the Service. The employer is not liable to withhold and pay the employee share of FICA taxes on the unreported tips.

If the Service determines that an employer’s employees have unreported tips and issues a Section 3121(q) Notice and Demand to the employer, the Service must assess the employer FICA taxes on the unreported tips within 3 years after April 15 of the calendar year following the year in which the Section 3121(q) Notice and Demand is made. For example, if the notice and demand is dated December 31, 2012, the liability is required to be reported on Form 941 for the fourth quarter of 2012, due on January 31, 2013. If the employer timely files Form 941, the period of limitations for assessment ends on April 15, 2016.

No, these two programs, while sharing the same goal (encouraging employees to report their tips as taxable income), are mutually exclusive.  The fact that employees are reducing their taxable income on their personal returns does not preclude the business owner from claiming the FICA Tip Credit. 

Yes, there’s an important new requirement for the FICA Tips Tax Credit as it relates to the Beauty and Personal Care industry; tips income must exceed 15% of gross receipts for those services in a calendar year to qualify for the credit. If tips fall below that threshold, the credit doesn’t apply.

The law authorizing the FICA tip tax credit (IRC Section 45B) specifies that employers can apply it to the minimum wage in effect on January 1, 2007 of $5.15 for the Restaurant and Hospitality Industry. 

The providing, delivering, or serving of food or beverages for consumption, if the tipping of employees delivering or serving food or beverages by customers is customary

The providing of any of the following services to a customer or client, if the tipping of employees providing such services is customary:

(i) Barbering and hair care.

(ii) Nail care.

(iii) Esthetics.

(iv) Body and spa treatments.

The tip credit minimum wage is the lowest hourly wage an employer can pay a tipped employee after factoring in the allowed tip credit. Under the current federal minimum wage of $7.25 per hour, employers can pay as little as $2.13, assuming tips cover the difference. Note that individual state minimum wage laws may set higher rates, so it’s important to review your jurisdiction’s labor standards act.

A tip credit on an employee’s paycheck means that your employer counts some of your tips toward the federal minimum wage requirement. Instead of paying the full hourly wage, they pay a lower tipped minimum wage, assuming your tips will cover the gap. If your total earned wages, including tips, don’t meet the required wage rate, your employer must make sure that you’re paid at least the federal minimum wage. Be sure your pay stubs reflect both base pay and tip earnings in separate categories so the employer and employee can track your compensation.

Supporters of the tip credit argue that it keeps labor costs manageable for restaurants, while critics say it leads to challenging wage fluctuations and potential underpayment for employees. The impact depends on the strength of state regulations and enforcement of fair labor standards, including the requirement that restaurants compensate workers for the full minimum wage if tips fall short.

Majority owners who are also employees do not qualify for the FICA Tips Tax Credit on their own tips, as the credit is specifically for the employer’s share of FICA taxes paid on their employees’ tips. 

The FICA tip credit is an employer-level credit designed to offset the employer’s income tax liability for the Social Security and Medicare taxes they pay on tips their staff receives from customers. The relevant tax code and IRS guidance differentiate between an employer and an employee for the purpose of this credit. 

- Employee Tips: The employer can claim the credit for FICA taxes paid on tips reported by their non-owner employees.

- Owner Tips/Income: Payments to a business owner (such as an S corporation officer/shareholder providing more than minor services) are treated as wages and are subject to FICA taxes, but those tips do not generate a FICA Tip Credit for the business owner themselves or the business with respect to the owner’s tips. Self-employed individuals also pay self-employment tax on their tips, but this is distinct from the employer-side FICA tip credit. 

In essence, the credit is intended to provide tax relief to the employer for taxes paid on other people’s (employees’) tip income, not for the owner’s own earnings from the business.