What Is the 45B Tax Credit for FICA on Tips?
Discover how the 45B tax credit helps food and beverage employers offset FICA taxes paid on employee tips above the federal minimum wage.
The 45B tax credit is a federal tax benefit for employers, primarily in the food and beverage industry. Formally known as the “Credit for Portion of Employer Social Security Paid with Respect to Employee Cash Tips,” it provides relief for the employer’s share of FICA taxes. Employers are responsible for paying Social Security and Medicare taxes on wages and reported tips. This credit allows businesses to reduce their federal income tax liability by the amount of FICA taxes paid on a specific portion of those employee tips.
Employer Eligibility for the Credit
To qualify for the 45B credit, a business must operate a food or beverage establishment where tipping for service is a customary practice. This includes businesses where employees receive tips from customers for providing, delivering, or serving food and drinks. The employer must also have paid their share of Social Security and Medicare (FICA) taxes on the tips their employees received. This applies whether the tips were directly reported by the employee or were allocated to them, and the credit is available even if the employee does not report the tips on their personal tax return.
Calculating the Credit Amount
The credit is equal to the employer’s 7.65% FICA tax contribution, but only on the amount of tips that are considered “creditable.” Any tips used to bring an employee’s hourly pay up to the minimum wage are not eligible for the credit calculation. This ensures the credit applies only to tips that are in excess of the base wage requirements.
A rule governs the minimum wage level used for this calculation. Due to the Small Business Work Opportunity Tax Act of 2007, the wage rate is frozen at the federal minimum wage that was in effect on January 1, 2007, which is $5.15 per hour. This $5.15 rate must be used for the calculation, regardless of the current, higher federal or applicable state minimum wage.
To illustrate, consider an employee who works 100 hours in a pay period and is paid a cash wage of $3.00 per hour, totaling $300. First, the minimum wage base is calculated using the mandated rate: 100 hours multiplied by $5.15 equals $515. The difference between this amount and the cash wages paid ($515 – $300 = $215) represents the portion of tips that are not eligible for the credit. If the employee reported $1,000 in tips for that period, the creditable portion would be $1,000 minus the $215 ineligible amount, which equals $785. The final tax credit is then calculated by multiplying these creditable tips by the 7.65% FICA rate ($785 x 0.0765), resulting in a credit of $60.05.
How to Claim the Credit
Employers claim the credit using Form 8846, “Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips.” This form is where the business documents the total tips subject to FICA, performs the calculation to determine the creditable portion above the $5.15 per hour wage threshold, and arrives at the final credit figure.
After completing Form 8846, the credit is transferred to Form 3800, “General Business Credit.” This form consolidates various business credits, and the 45B credit is claimed as part of this larger calculation against the employer’s overall income tax liability. Unused credits can generally be carried back one year or carried forward for up to 20 years.
An employer cannot receive both a deduction and a credit for the same tax payment. The business’s income tax deduction for its share of FICA taxes must be reduced by the amount of the 45B credit claimed. For example, if an employer paid $5,000 in FICA taxes and claimed a $1,500 credit, their deductible payroll tax expense is reduced to $3,500.