Tips are wages for FICA, and the employer pays its 7.65 percent share on them. Section 45B gives back part of that cost as a general business credit. Many restaurant clients leave it unclaimed because the payroll system does not compute it. The 2025 legislation, Public Law 119-21, extended the credit to certain beauty and spa services for taxable years beginning after December 31, 2024, so personal service clients now belong in the same conversation. For the tip income side, see the no tax on tips deduction.
How the credit works
Under section 45B(a), the credit for the year equals the excess employer social security tax paid or incurred. Under section 45B(b)(1), that is the employer's section 3111 tax on tips treated as paid by the employer under section 3121(q), to the extent the tips exceed the amount by which wages (excluding tips) are less than the total that would be payable at the federal minimum wage under section 6(a)(1) of the Fair Labor Standards Act, determined without regard to the tip credit rule in section 3(m). In the case of food or beverage establishments, the minimum wage is the rate in effect on January 1, 2007, which was $5.15 per hour. For the beauty and spa services added in 2025, the statute carries no January 1, 2007 rule, so the current federal minimum wage of $7.25 per hour applies. The tests are applied month by month for each employee.
In plain terms: tips that merely make up the minimum wage gap earn no credit. Tips above it do. The employer's tax under section 3111, which is 6.2 percent for old-age, survivors and disability insurance plus 1.45 percent for hospital insurance, or 7.65 percent combined, on that excess comes back as a credit.
Eligible lines of business
Only tips received in connection with these services count, and only if tipping is customary:
- Providing, delivering or serving food or beverages for consumption.
- Barbering and hair care, nail care, esthetics, and body and spa treatments, added by the 2025 amendment.
No double benefit
Under section 45B(c), no deduction is allowed for the amount used to determine the credit. The employer's payroll tax deduction is reduced by the credit amount. The credit is part of the general business credit, claimed on Form 8846, and The taxpayer may elect that the section not apply for a year.
Worked example
A restaurant server worked 120 hours in a month. The restaurant paid the federal minimum direct cash wage for a tipped employee of $2.13 per hour, and the server reported $1,800 of tips for the month. The minimum wage in effect on January 1, 2007 was $5.15 per hour.
- Wages excluding tips: 120 times $2.13, or $255.60.
- Minimum wage amount: 120 times $5.15, or $618.00.
- Gap: $618.00 minus $255.60, or $362.40.
- Tips above the gap: $1,800 minus $362.40, or $1,437.60.
- Credit: $1,437.60 times 7.65 percent, or $109.98.
Repeat for each tipped employee and each month. A restaurant with 25 servers averaging a similar month would claim roughly 25 times 12 times $109.98, or $32,994. The restaurant also loses the deduction for that same $32,994 of payroll tax. At a 21 percent rate that costs $6,929 of tax, so the net benefit is $32,994 minus $6,929, or $26,065.
Salon example with no gap
A salon stylist works 160 hours in a month. The salon pays $12.00 per hour in wages, or $1,920, and the stylist receives $2,000 in tips from customers where tipping is customary.
- Minimum wage amount: 160 times $7.25, or $1,160.
- Wages of $1,920 are not less than $1,160, so the gap is zero.
- All $2,000 of tips count.
- Credit: $2,000 times 7.65 percent, or $153.00.
When wages already exceed the minimum wage amount, nothing is subtracted from the tips. The same stylist paid only $900 in wages would have a gap of $260 ($1,160 minus $900), tips above the gap of $1,740, and a credit of $133.11 ($1,740 times 7.65 percent, rounded).
Common errors
- Using the current $7.25 rate for a restaurant. The statute fixes the food and beverage comparison at the January 1, 2007 rate of $5.15.
- Using the 2007 rate for a salon. That rule is limited to food or beverage establishments.
- Testing the year as a whole. The comparison runs month by month for each employee.
- Counting tips that are not customary or not from the listed services, such as tips on goods sales.
- Taking the full payroll tax deduction as well as the credit, which section 45B(c) disallows.
- Computing the credit from reported tips only. Tips deemed paid by the employer under section 3121(q) count whether or not reported under section 6053.
- Overlooking the election not to claim the credit for a year in section 45B(d).
What to collect
- Monthly payroll registers showing cash wages, reported tips and hours for each tipped employee.
- Total employer social security and Medicare tax on tips from the payroll provider.
- A schedule applying the minimum wage gap by employee and by month.
- Form 8846 prior-year filings, to see whether the credit is claimed already and whether amended returns are available for open years.
- A reconciliation of reported tips to the restaurant's Form 8027 and tip allocations, as noted in the restaurant audit guide.
The statute counts tips deemed paid by the employer under section 3121(q) whether or not they are reported under section 6053, so the base is the employer's FICA on tips, not the reported-tip total alone.
Do I need to file Form 8846?
The credit is part of the general business credit. The IRS describes Form 8846 as the form food and beverage establishments use to claim the credit for social security and Medicare taxes paid or incurred on employee tips, and the IRS lists Form 3800, General Business Credit, as the related form.
Sources
- Legal Information Institute, 26 U.S.C. 45B, Credit for portion of employer social security taxes paid with respect to employee cash tips: https://www.law.cornell.edu/uscode/text/26/45B
- U.S. Department of Labor, Wage and Hour Division, Fact Sheet #15, Tipped Employees Under the FLSA ($2.13 cash wage, $7.25 minimum wage): https://www.dol.gov/agencies/whd/fact-sheets/15-tipped-employees-flsa
- U.S. Department of Labor, Wage and Hour Division, federal minimum wage history ($5.15 in effect January 1, 2007): https://www.dol.gov/agencies/whd/minimum-wage/history/chart
- Legal Information Institute, 26 U.S.C. 3111, Rate of tax (employer 6.2 and 1.45 percent): https://www.law.cornell.edu/uscode/text/26/3111
- Internal Revenue Service, About Form 8846, Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips: https://www.irs.gov/forms-pubs/about-form-8846
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