The FICA tip credit: how restaurants recover payroll tax on tips

When employees report tips, you owe the employer share of Social Security and Medicare tax on them, just as you do on wages. The FICA tip credit under §45B returns most of that tax.

Who qualifies

• Businesses providing food or beverages for consumption on or off premises where tipping is customary.
• Starting in 2025, businesses providing beauty services, meaning barbering, hair, nail, esthetics, and spa services, also qualify.

How the credit is calculated

The credit equals 7.65% of tips after subtracting the tips needed to bring the employee's pay up to the federal minimum wage in effect on January 1, 2007, which was $5.15 an hour. That 2007 baseline applies to food and beverage businesses. Beauty service businesses measure against the current $7.25.

The calculation is made for each employee for each month:

1. Start with the cash wage paid per hour, for example a $2.13 tipped minimum or a higher state wage.
2. If that wage is below $5.15, the shortfall times hours worked is excluded from creditable tips.
3. Multiply the remaining reported tips by 7.65% to arrive at the credit.

In states where the cash wage already exceeds $5.15, all reported tips are generally creditable. For the rare employee whose wages and tips exceed the Social Security wage base of $184,500 in 2026, tips above the base earn credit only at the 1.45% Medicare rate.

Key numbers: 7.65% employer FICA · $5.15 baseline wage for food and beverage · claimed on Form 8846 · part of the general business credit with a 1-year carryback and 20-year carryforward.

A worked example

A full-service restaurant in a state with a $10 tipped wage has 30 servers and bartenders who report $1.4 million of tips in 2026. Because cash wages exceed $5.15, all tips are creditable, and the credit is $1,400,000 × 7.65% = $107,100.

The credit must be offset by an equal reduction in the deduction for FICA taxes. The net benefit is therefore the credit minus the tax value of the lost deduction, which still leaves a large gain.

In Connecticut

Connecticut's tipped cash wages are $6.38 an hour for servers and $8.23 for bartenders. Both exceed the $5.15 baseline, so all tips that a Connecticut restaurant's servers and bartenders report are generally creditable. Don't confuse §45B with Connecticut's own tip credit, which is the part of the state minimum wage that tips can cover. Section 45B is a federal income tax credit only, with no Connecticut version. The Connecticut restaurant guide covers the state rules.

Claiming missed years

Some operators, especially newer or smaller ones, have never claimed the credit. Form 8846 lets you claim it on an amended return within three years of the return's due date. For S corporations, the credit flows through to owners, who may need to amend their individual returns. Partnerships under the BBA audit rules generally file an administrative adjustment request instead of amending, and partners usually pick up the credit on a current-year return.

Making tip reporting accurate

The credit generally applies to reported tips, plus any tips on which the IRS bills you employer FICA after a tip audit. Strong POS tip tracking, tip pooling records, and Form 4070 or its electronic equivalents support both the credit and the employees' new tip deduction.

Common mistakes

1. Applying the current federal $7.25 minimum wage to restaurant tips instead of $5.15. The $7.25 baseline is correct only for beauty services.
2. Including mandatory service charges, which are wages, not tips.
3. Forgetting to reduce the FICA deduction.
4. Not passing the credit through correctly on partnership and S corp returns.

How Summer Associates helps

Summer Associates' restaurant team calculates the credit from payroll detail, files Form 8846, and reviews prior years for missed credits that can be recovered.

This guide is general education based on federal and Connecticut law as of 2026-11-15. State rules differ and facts matter. Before acting, get advice for your situation from Summer Associates or another qualified advisor.