FICA tip credit: an employer's guide to Section 45B

What is the FICA tip credit?

The FICA tip credit — formally the credit for employer social security and Medicare taxes paid on certain employee tips, under Internal Revenue Code Section 45B — refunds employers the 7.65% FICA tax they paid on the portion of employee tips above the federal minimum wage of $5.15/hour (the rate frozen for this calculation). It's a dollar-for-dollar credit against income tax, not a deduction.

It was originally written for restaurants, but the statute applies to any employer in a business "where tipping is customary" for food or beverage. Many towing, valet, salon, delivery, and personal service operators don't qualify on the food-and-beverage test — but if your company also runs a cafe, food truck, or beverage service alongside the field work, the tipped portion of that side qualifies. Always confirm eligibility with your CPA.

Who can claim it

• You're a business where tipping for food or beverages is customary.
• You paid employer FICA on tips your employees received.
• The tips are reported (cash, card, or pooled).
• Wages plus tips bring the employee above $5.15/hour for the period.

S-corps, partnerships, and sole proprietors all qualify — the credit flows through to the owner's personal return via Schedule K-1.

How the math works

The calculation, per employee, per pay period:

Example: a driver earns $15/hr base wage and reports $400 in tips during a pay period. Wages already exceed $5.15/hr, so the shortfall is $0. The full $400 is creditable. Credit = $400 × 7.65% = $30.60 for that employee, that period. Across a 20-person crew over a year, this routinely lands in the $5,000–$25,000 range.

How to claim it: Form 8846

File IRS Form 8846 (Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips) with your annual return. The form is short — four lines — but it depends on accurate per-employee tip totals for the year.

• Line 1: Tips received by employees for services on which you paid or owed FICA.
• Line 2: Tips not subject to the credit (the shortfall portion).
• Line 3: Creditable tips (Line 1 − Line 2).
• Line 4: Multiply Line 3 by 7.65%.

The credit is part of the General Business Credit (Form 3800). Unused credit carries back 1 year and forward 20.

The recordkeeping problem

The credit lives or dies on tip documentation. The IRS expects a per-employee, per-period record of tips received — including cash and P2P (Venmo, Cash App, Zelle) tips that never touched payroll. Most service businesses lose the credit not because they don't qualify, but because cash tips were never logged in a way an auditor can read.

• Card tips: captured automatically by the processor — easy.
• Cash tips: must be reported by the employee (Form 4070 or equivalent).
• P2P tips: same as cash — employee-reported, employer-logged.

Blue Collar Tips captures every tip — card, cash, and P2P — with a per-driver ledger, timestamp, and customer rating link. When tax time comes, your CPA can pull a per-employee tip report in one click and drop the totals straight into Form 8846.

Common mistakes

• Not claiming it at all. Many small operators assume the credit is only for big chains. It isn't.
• Double-dipping the deduction. If you claim the credit, you cannot also deduct the same FICA tax as a business expense. Your CPA will add it back.
• Excluding cash tips. Unreported cash tips can't be claimed — but they also can't be the reason you skip the whole credit on reported tips.
• Missing prior-year credits. You can amend up to three years back with Form 1040-X / 1120-X if the credit was missed.

This guide is informational, not tax advice. Talk to a CPA who knows IRC § 45B before filing.