An Overview of the §45B FICA Tip Credit

This tax credit can save targeted businesses thousands of dollars in tax

The One Big Beautiful Bill Act (OB3 Act) created a new deduction for qualified tips for tax years 2025 through 2028. However, within that provision, there is a significant expansion of the §45B FICA tip credit. The §45B credit offsets an employer’s FICA tax liability on certain employee tips.

The §45B credit initially applied only to businesses that provide, deliver, or serve food or beverages for consumption if tipping is customary (i.e., restaurants). For these businesses, tips used to meet the federal minimum wage rate in effect on January 1, 2007 ($5.15 an hour) are not eligible for the credit.

For tax years beginning after December 31, 2024, the §45B credit also applies to certain beauty services businesses if tipping is customary. For these businesses, tips used to meet the current federal minimum wage rate ($7.25 an hour) are not eligible for the credit. Beauty services that qualify for the §45B credit include barbering and hair care, nail care, esthetics, and body and spa treatments.

Calculating the Credit

The business calculates the §45B FICA tip credit on Form 8846, Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips.

Step 1: Identify the tips on which the business paid FICA tax. (Line 1)

These are the tips that the employee reported on which the business paid employer Social Security and Medicare taxes during the tax year. Service charges determined by the business and not voluntarily made by the customer are not tips; see Rev. Rul. 2012-18.

Step 2: Calculate any tips that are not creditable. (Line 2)

If the employee’s wages (excluding tips) are less than $5.15 per hour (restaurants) or $7.25 per hour (beauty services), some of the tips are not creditable. The noncreditable portion equals the amount that would be payable to the employee at $5.15 per hour (restaurants) or $7.25 per hour (beauty services) minus the actual wages (excluding tips) paid to the employee.

Step 3: Determine creditable tips. (Line 3)

Subtract any non-creditable tips from the total tips to determine the credit base.

Step 4: Figure the credit amount. (Line 4)

Multiply the creditable tips by the 7.65% FICA tax rate to compute the credit amount.

Claiming the Credit

Under §45B(c), the business claiming the §45B credit must reduce its payroll tax expense deduction by the credit amount.

For partnerships and S corporations, the credit is a separately stated item reported on the owner’s Schedule K-1 and claimed by the owner(s) on their tax returns.

The §45B credit is a component of the §38 general business credit, and unused credits can be carried back one year or carried forward for up to 20 years under §39.

If a taxpayer who qualified for the §45B credit omitted it, the taxpayer can file an amended return to claim the credit, subject to the refund statute of limitations.

Restaurant Calculation Example

A food or beverage employee worked 100 hours and received $450 in tips for January 2026. The worker received $375 in wages (excluding tips) at the rate of $3.75 an hour. If the employee had been paid $5.15 an hour, the employee would have received wages, excluding tips, of $515. For §45B credit purposes, the $450 in tips is reduced by $140 (the difference between $515 and $375), and only $310 of the employee’s tips for January 2026 is taken into account in calculating the credit.

The credit amount for this employee is $24, which is 7.65% of $310. The employer must also reduce its payroll tax expense deduction by $24.

Beauty Services Calculation Example

A beauty services employee worked 100 hours and received $450 in tips for January 2026. The worker received $725 in wages (excluding tips) at the rate of $7.25 an hour (the current federal minimum wage). Since the employee was paid at least $7.25 per hour, the entire $450 tip amount is eligible for the §45B credit.

The credit amount for this employee is $34, which is 7.65% of $450. The employer must also reduce its payroll tax expense deduction by $34.

IRS Webpage is Wrong

The IRS has a webpage that provides an overview of the §45B FICA tip credit; however, the current version, last updated in August 2025, incorrectly applies the $7.25 wage threshold to restaurants, which is inconsistent with §45B(b)(1)(B) and the 2025 Form 8846 instructions. It also omits the addition of beauty services businesses.

This significant error reinforces that content on the IRS website is not appropriate for taking positions on tax returns. Tax professionals should rely on the authorities listed in Treas. Reg. §1.6662-4(d)(3)(iii) (e.g., the Code, Treasury regulations, court cases, etc.). Please note that IRS publications are not included in this list of authorities and should not be relied upon for tax return positions.

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