The FICA Tip Credit: What It Is and How to Claim It
Navigate the FICA tip credit to reduce your business's tax liability on employee tips. A comprehensive guide for employers.
The FICA Tip Credit is a federal tax incentive for businesses with tipped workers. It allows eligible employers to offset a portion of the Social Security and Medicare taxes paid on employee tips. This credit helps reduce the tax burden on employers in industries where tipping is customary and encourages accurate tip reporting.
Understanding the FICA Tip Credit
FICA stands for the Federal Insurance Contributions Act, which mandates payroll taxes used to fund Social Security and Medicare programs. Employers and employees each contribute a portion of these taxes, with the employer’s share typically being 6.2% for Social Security and 1.45% for Medicare, totaling 7.65% of wages, including reported tips.
Employers are required to pay FICA taxes on all employee wages, including tips, even though the tips are paid directly by customers. The FICA Tip Credit aims to alleviate this employer tax liability, recognizing that these businesses bear a tax expense on income they do not directly control.
Eligibility for the Credit
Eligibility for the FICA Tip Credit is generally limited to employers in the food and beverage industry where tipping is customary. This includes restaurants, bars, and other venues where employees receive tips for food or beverage service. As of 2025, eligibility has also expanded to include beauty service businesses like barber shops, hair and nail salons, and spas, provided tipping is customary in those settings.
To qualify, employees must receive tips from customers and report these tips to their employer. The employer must then pay or incur their share of Social Security and Medicare taxes on these reported tips during the tax year. The credit applies only to tips that exceed a federal minimum wage threshold. This threshold is based on the federal minimum wage rate of $5.15 per hour, which was in effect on January 1, 2007.
Calculating the Credit
Calculating the FICA Tip Credit involves several steps. First, employers must gather all reported tips from their employees, encompassing both cash and non-cash tips. Next, it is necessary to identify the portion of these tips that was used to bring an employee’s wages up to the federal minimum wage rate of $5.15 per hour. These tips are specifically excluded from the credit calculation.
After determining the non-creditable tips, this amount is subtracted from the total tips reported by the employee. The remaining sum represents the “creditable tips,” which are the tips exceeding the $5.15 per hour minimum wage threshold. Finally, to arrive at the actual credit amount, these creditable tips are multiplied by the employer’s share of FICA taxes (7.65% for Social Security and Medicare). For example, if an employee’s tips exceed the $5.15 per hour threshold, the employer can claim a credit on the FICA taxes paid on those excess tips.
Claiming the Credit
To claim the FICA Tip Credit, eligible employers must complete and submit IRS Form 8846, “Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips.” This form requires information on total tips received by employees and the FICA taxes paid on those tips. Accurate record-keeping of employee tip reports and payroll summaries is important for proper completion.
The FICA Tip Credit is a non-refundable general business credit. It can reduce an employer’s income tax liability but will not result in a refund if the credit exceeds the tax owed. The calculated credit from Form 8846 is reported on Form 3800, General Business Credit, and attached to the employer’s federal income tax return, such as Form 1120 for corporations or Form 1065 for partnerships. Any unused credit can be carried back for one year or carried forward for up to 20 years.