The FICA tip credit lets employers in businesses where tipping is customary recover the employer share of Social Security and Medicare tax (7.65%) paid on employee tips, minus the tips needed to bring each worker up to a wage floor. It is claimed on Form 8846. Since tax years beginning after December 31, 2024, it covers barbering, hair care, nail care, esthetics and spa services as well as food and beverage businesses.
Restaurants still measure the FICA tip credit against the $5.15 federal minimum wage in effect on January 1, 2007. Beauty service employers use the current $7.25 rate. This guide covers who qualifies, how the monthly wage floor works, the Form 8846 lines, a worked salon example, and how the credit sits alongside the employee "no tax on tips" deduction and the new Form W-2 code TP.
The credit sits in Section 45B of the Internal Revenue Code. Under the statute, the credit equals the "excess employer social security tax" the business paid during the year, and it is treated as part of the general business credit under section 38.
Employers pay the 6.2% Social Security share and the 1.45% Medicare share on reported tips in the same way they pay it on wages. Those payroll taxes run through the quarterly return, which is covered in our Form 941 line-by-line guide. The FICA tip credit gives back the employer portion attributable to qualifying tips as a dollar-for-dollar reduction of income tax.
A few structural points shape how the credit behaves:
The One Big Beautiful Bill Act (Public Law 119-21, signed July 4, 2025, and now referred to by the IRS as the Working Families Tax Cuts) rewrote section 45B(b)(2). Tips now count when they are received from customers or clients for either of two groups of services.
The statutory note on Cornell's page states that the 2025 amendments "shall apply to taxable years beginning after December 31, 2024." For a calendar-year salon, 2025 is the first year with a credit. Beauty tips received in 2024 and earlier do not qualify.
The IRS tip recordkeeping and reporting page confirms the expansion: "The WFTC amended section 45B to extend the credit beyond food or beverage establishments to include certain tips received by employees providing barbering and hair care, nail care, esthetics, and body or spa treatment services."
Section 45B sets no revenue test and no minimum share of receipts from tips for beauty businesses. The conditions are that the service is on the list, tipping is customary for it, and the employer paid employer Social Security and Medicare tax on the tips. Owners who receive tips while working in their own business are a separate question, because the credit applies to tax paid on tips received by an employee.
The credit does not apply to every tipped dollar. Section 45B(b)(1)(B) excludes tips that only fill the gap between an employee's cash wages and the federal minimum wage for the month. The 2025 amendment set two different floors.
| Business type | Wage floor for the credit | Source of the floor |
|---|---|---|
| Food or beverage | $5.15 an hour | FLSA minimum wage "as in effect on January 1, 2007" |
| Beauty services | $7.25 an hour | FLSA section 6(a)(1) minimum wage currently in effect |
Section 45B itself states no dollar amounts. It points to the minimum wage under section 6(a)(1) of the Fair Labor Standards Act, which 29 U.S.C. § 206(a)(1)(C) sets at $7.25 an hour. The 2025 Form 8846 and its instructions spell this out. For food or beverage employers, the credit is unavailable "for taxes on any tips that are used to meet the federal minimum wage rate in effect on January 1, 2007, of $5.15 an hour." For beauty service employers, the floor is "the federal minimum wage rate currently in effect, of $7.25 an hour."
The test runs per employee, per month:
The floor is set "without regard to section 3(m)" of the Fair Labor Standards Act, which is the provision that lets employers count tips toward the minimum wage. An employee paid a $2.13 cash wage under a state tip credit therefore has a large shortfall that eats into creditable tips. An employee paid $15 an hour has none.
The IRS example on the form uses a server who worked 100 hours in October 2025, received $450 in tips and was paid $3.75 an hour. At $5.15 an hour the wages would have been $515. Actual wages were $375, so $140 of tips are excluded and $310 count. The credit is $310 x 7.65% = $23.72, against $34.43 of employer FICA on the full $450.
Very high earners need one adjustment. Once an employee's wages and tips pass the Social Security wage base ($176,100 for 2025 and $184,500 for 2026, per the Form 8846 instructions), further tips carry only the 1.45% Medicare share, so the credit on those tips is 1.45%.
A salon in a state that allows a tip credit against minimum wage has three tipped employees in March 2026. All tips are voluntary customer tips that the employees reported. The floor is $7.25 because these are beauty services.
| Employee | Hours | Cash wage rate | Cash wages | Wages at $7.25 | Shortfall (excluded tips) | Tips reported | Creditable tips | Credit at 7.65% |
|---|---|---|---|---|---|---|---|---|
| Stylist B | 120 | $2.13 | $255.60 | $870.00 | $614.40 | $1,800.00 | $1,185.60 | $90.70 |
| Stylist C | 140 | $15.00 | $2,100.00 | $1,015.00 | $0.00 | $1,200.00 | $1,200.00 | $91.80 |
| Nail tech D | 80 | $4.50 | $360.00 | $580.00 | $220.00 | $300.00 | $80.00 | $6.12 |
| Total | $834.40 | $3,300.00 | $2,465.60 | $188.62 |
Mapped to Form 8846 for that month, line 1 is $3,300.00, line 2 is $834.40, line 3 is $2,465.60 and line 4 is $2,465.60 x 0.0765 = $188.62. The salon paid $252.45 of employer FICA on all $3,300 of tips, so $63.83 of that tax is not recoverable because it relates to tips that only filled the minimum wage gap. On the annual form, the monthly line 2 amounts for every employee are added together.
The floor makes a visible difference. If Stylist B worked the same hours at a restaurant, the floor would be 120 x $5.15 = $618.00, the shortfall would be $362.40 and creditable tips would be $1,437.60. The higher beauty floor excludes $252.00 more of Stylist B's tips each month.
After filing, the salon reduces its deduction for employer payroll taxes by the amount of the credit. A $188.62 credit means $188.62 less deduction for that month's employer FICA.
Form 8846, Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips, is a single page with six lines.
The instructions also say an employer "can claim or elect not to claim the credit any time within 3 years from the due date of your return on either your original return or on an amended return." Restaurants that skipped the credit can review open years, and salons can still add it to an original or amended 2025 return. A partnership or S corporation that claims it passes the credit to owners on Schedule K-1, which our overview of the 1040, 1065 and 1120 tax prep workflow puts in the context of a full return cycle.
The credit depends on accurate tip reporting. The IRS states that employees must report all cash tips to the employer "unless the total is less than $20 per month from that employer," and must report them by the 10th day of the following month. Tips that are never reported to the employer carry no employer FICA, so they generate no credit.
Service charges are a frequent error. The same IRS page says: "Service charges added to a bill by the employer and distributed to an employee are not tips. The employer must treat service charges as wages." An automatic gratuity on a large party is therefore a wage, and it helps meet the wage floor without adding to line 1. Our list of common restaurant tax mistakes covers that and related errors.
Large food or beverage establishments also file an annual tip information return, explained in our guide to IRS Form 8027 and allocated tips. Allocated tips are not tips reported to the employer and do not belong on Form 8846 line 1. A monthly close that ties POS tip reports to payroll, as set out in our bookkeeping checklist for restaurants, makes the year-end Form 8846 a summary of numbers the business already has.
The same 2025 law created an employee deduction for qualified tips. The IRS fact sheet on the new deductions says that for 2025 through 2028 the "maximum annual deduction is $25,000" and that it "phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers)." It applies to tips in occupations on the IRS list of those that customarily and regularly received tips on or before December 31, 2024.
The two provisions apply to different taxpayers and different taxes:
| Item | FICA tip credit (§45B) | No tax on tips deduction |
|---|---|---|
| Who benefits | Employer | Employee or self-employed worker |
| Tax affected | Employer's income tax, via the general business credit | Worker's federal income tax |
| Form | Form 8846, then Form 3800 or Schedule K | Worker's individual return |
| Years | Permanent | 2025 through 2028 |
The deduction does not remove tips from payroll tax. The 2026 General Instructions for Forms W-2 and W-3 state that tips "are still generally subject to federal income tax withholding and both the employer share and employee share of social security tax and Medicare tax if the tips received are $20 or more per month." Because the employer still pays its 7.65% on those tips, the FICA tip credit is unaffected by an employee claiming the deduction.
The reporting has changed, though. For 2026, Form W-2 box 12 code TP shows the "total amount of cash tips reported to the employer," and box 14b carries the Treasury Tipped Occupation Code. If any tips came from a nonqualifying occupation, "000" must be entered as one of the codes. Our article on the 2026 Form W-2 redesign and new box 12 codes covers the layout. Overtime has a parallel code, TT, discussed in our guide to the qualified overtime compensation deduction.
For a restaurant or salon, the code TP totals and the tips on Form 8846 line 1 come from the same tip reports. Reconciling them each year catches tips that were reported but never run through payroll, and the reverse. The two figures will not always match, since line 1 is limited to tips from the qualifying services and code TP covers all cash tips reported to the employer.
Can a hair salon claim the FICA tip credit for 2025? Yes. The 2025 amendment to section 45B applies to taxable years beginning after December 31, 2024, and covers barbering and hair care, nail care, esthetics, and body and spa treatments where tipping is customary. A calendar-year salon can claim it on its 2025 return and later years, using the $7.25 wage floor.
Why do restaurants use $5.15 an hour instead of $7.25? Section 45B(b)(1)(B) fixes the floor for food or beverage establishments at the minimum wage "as in effect on January 1, 2007," which was $5.15. Beauty service employers use the federal minimum wage currently in effect, which is $7.25 an hour as of October 2026.
Does the FICA tip credit cover the employer's Medicare tax too? Yes. Form 8846 multiplies creditable tips by 7.65%, which covers both the 6.2% Social Security share and the 1.45% Medicare share. For tips above the Social Security wage base, only the 1.45% Medicare share is credited.
Do automatic gratuities count toward the FICA tip credit? No. The IRS treats service charges added to a bill by the employer as wages, so they are excluded from Form 8846 line 1. They do count as cash wages when testing whether an employee met the $5.15 or $7.25 floor.
Does an employee's "no tax on tips" deduction reduce the employer's credit? No. The deduction only affects the worker's federal income tax. Tips remain subject to employer Social Security and Medicare tax, so the employer's FICA tip credit is figured the same way.
Madras Accountancy supports US CPA firms and the businesses they serve with payroll processing, bookkeeping and business tax return preparation, including the tip records and credit forms that restaurants and beauty businesses rely on. Firms with hospitality clients can also see our hospitality accounting services page. To discuss your clients' payroll and tax work, contact our team.
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