What is the FICA Tip Credit?

The FICA Tip Credit is one of the most valuable—yet most overlooked—tax benefits available to restaurants, bars, and hospitality businesses. If you have tipped employees, you're likely leaving thousands of dollars on the table every year.

What Exactly is the FICA Tip Credit?

The FICA Tip Credit, officially known as Section 45B Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips, is a federal tax credit that allows employers to recover a portion of the Social Security and Medicare (FICA) taxes they pay on their employees' tip income.

Here's what makes this credit so powerful: it's a dollar-for-dollar reduction of your federal income tax liability. Unlike a deduction (which only reduces taxable income), a tax credit directly reduces the amount of tax you owe.

Why Was This Credit Created?

The FICA Tip Credit was established by Congress to address a specific challenge faced by food and beverage establishments. Here's the background:

• The Tipping Dilemma: Restaurants can pay tipped employees less than minimum wage (tip credit wages), but they must still pay the full employer share of FICA taxes on all reported tips
• The Tax Burden: This created a situation where employers paid FICA taxes on income (tips) they didn't actually pay to the employee
• Congressional Solution: To offset this burden, Congress created Section 45B, allowing employers to claim a credit for FICA taxes paid on tips above the federal minimum wage

How Does the FICA Tip Credit Work?

The Basic Calculation

The credit is calculated as 7.65% (the employer's share of FICA taxes) of qualified tip income. Here's the breakdown:

• 6.2% Social Security tax (on tips up to the Social Security wage base)
• 1.45% Medicare tax (on all tips)
• Total: 7.65% employer FICA tax rate

What Are "Qualified Tips"?

Not all tips qualify for the credit. Qualified tips are tips that:

1. Are received from customers for providing, delivering, or serving food or beverages
2. Exceed the amount needed to bring the employee up to federal minimum wage ($7.25/hour as of 2025)
3. Are reported to you as the employer
4. Are subject to FICA taxes

Who Can Claim the FICA Tip Credit?

The credit is available to businesses where tipping is customary, including:

• Restaurants: Full-service, fine dining, casual dining, diners
• Bars and Nightclubs: Cocktail lounges, sports bars, pubs
• Hotels: Especially those with room service, bellhops, and concierge services
• Catering Companies: Where staff receives tips at events
• Country Clubs and Golf Courses: With food and beverage service
• Casinos: With restaurants and beverage service
• Coffee Shops and Cafes: Where baristas receive tips

Learn more about specific eligibility in our Eligibility Requirements guide.

How Much Can You Claim?

The amount varies based on several factors:

• Number of tipped employees
• Total reported tip income
• Your current wage structure
• Hours worked by tipped employees

Typical Credits by Business Size:

• Small Restaurant (5-10 servers): $5,000 - $15,000 per year
• Medium Restaurant (15-25 servers): $20,000 - $40,000 per year
• Large Restaurant/Chain: $50,000 - $150,000+ per year

Use our detailed calculator guide to estimate your potential credit.

Key Benefits of the FICA Tip Credit

Common Misconceptions

Misconception #1: "It's Too Good to Be True"

The FICA Tip Credit has been part of the tax code since 1993. It's a legitimate, IRS-approved tax credit designed specifically for businesses with tipped employees. Over $1 billion has been claimed by businesses nationwide.

Misconception #2: "My CPA Would Have Told Me"

Many general CPAs don't specialize in hospitality tax credits. The FICA Tip Credit requires specific calculations and documentation that many accountants aren't familiar with. That's why businesses often miss out on this valuable benefit.

Misconception #3: "I Can't Afford Professional Help"

At Tip Tax Partner, we work on a contingency fee basis—you pay nothing upfront and only pay when you receive your tax credit. There's zero financial risk.

Misconception #4: "It Will Trigger an Audit"

When properly documented and filed, the FICA Tip Credit does not increase your audit risk. We ensure full IRS compliance with every claim. Learn more in our IRS Audits & Compliance guide.

How to Get Started

Claiming the FICA Tip Credit involves several steps:

1. Eligibility Assessment: Determine if your business qualifies
2. Data Collection: Gather payroll records, tip reports, and tax forms
3. Credit Calculation: Calculate qualified tips and credit amount
4. IRS Filing: File Form 8846 with your tax return or amended return
5. Receive Your Credit: Get funded when the IRS approves your claim

At Tip Tax Partner, we handle the entire process for you. Learn more about our claiming process.

Tax Implications to Consider

There's one important trade-off to understand:

When you claim the FICA Tip Credit, you must reduce your wage expense deduction by the amount of the credit claimed. However, because:

• Credits are dollar-for-dollar tax reductions
• Deductions only reduce taxable income

The credit is almost always more valuable than the deduction, resulting in significant net tax savings.

Example: If you're in the 21% corporate tax bracket and claim a $20,000 credit, you'll lose a $20,000 deduction worth $4,200 in tax savings. Your net benefit is $15,800.

Read more about tax implications and deduction adjustments.

Next Steps

Now that you understand what the FICA Tip Credit is, here's what to do next:

1. Check Your Eligibility: Review our eligibility requirements
2. Estimate Your Credit: Use our calculation guide
3. Get Professional Help: Let us handle the complex filing process
4. Start Claiming: Recover credits for current and past tax years