The FICA Tip Credit (45B) in Dollars, Plus the New Tip Deduction

Written by The Pragmatic CFO. 15+ years running restaurant P&Ls.

This article is part of The Prime Cost Series.

If your servers and bartenders report tips, you’re probably owed a federal tax credit every year. It’s called the FICA tip credit, section 45B, and plenty of restaurants never claim it. Here’s what it’s worth in dollars, plus what the new tip deduction changes for your staff and your payroll.

What the FICA tip credit is

You pay the employer half of Social Security and Medicare, 7.65%, on the tips your staff report. The credit gives that money back on most of those tips. You file it on Form 8846 with your business return.

• Who qualifies: food and beverage businesses where tipping is customary.
• Which tips count: reported tips above what it takes to bring each employee to $5.15 an hour, the federal minimum wage in 2007. The law never updated that number.
• What it’s worth: 7.65% of those creditable tips.
• The catch: it’s a credit against income tax, it isn’t refundable, and you can’t also deduct the FICA you used to claim it. Unused credit carries back one year and forward up to 20.

The math for one server

Take a server who works 30 hours a week at a $2.13 cash wage and reports $600 in tips.

Step	Amount
Cash wages, 30 hours at $2.13	$63.90
Pay needed to reach $5.15 an hour	$154.50
Tips used to close that gap	$90.60
Creditable tips, $600 minus $90.60	$509.40
Credit for the week, 7.65%	$38.97
Credit for 50 weeks	about $1,948

With 20 tipped employees like that, the credit is about $39,000 a year. Your net gain is a bit less because you give up the deduction on that FICA, but it’s still real money.

If your state makes you pay full minimum wage before tips, as California does, the cash wage is already above $5.15. Then every reported tip dollar counts toward the credit.

The new tip deduction is for your staff, not you

The federal law passed in 2025 added a deduction for workers. It doesn’t change your credit. It changes what your staff owe and what your payroll has to report.

• How much: employees can deduct up to $25,000 of qualified tips per return, for 2025 through 2028.
• Who loses it: it shrinks by $100 for every $1,000 of income over $150,000 single, or $300,000 married filing jointly.
• What it covers: federal income tax only. Social Security and Medicare still apply, so your FICA and your credit work the same as before.
• What counts as a tip: money the guest chose to leave. A mandatory service charge isn’t a tip. See service charges vs tips.
• What payroll must do: from 2026, qualified tips have to be shown separately on the W-2 or 1099, with the worker’s tip occupation code. Ask your payroll provider now whether it’s set up.

What to do this month

• Pull last year’s reported tips by employee from payroll.
• Ask your CPA whether you claimed Form 8846, and if not, whether you can amend.
• Confirm with your payroll provider that 2026 W-2s will show qualified tips separately.
• Put the credit in your tax planning, not your monthly P&L. It shows up at filing time, not in prime cost.

Tax rules change and your situation matters. Treat this as the question to bring to your CPA, not the final answer.

More on this: every line in labor cost.

FAQ

What is the FICA tip credit?
A federal credit for restaurants and bars equal to the employer’s 7.65% FICA on reported tips above the $5.15 an hour level. It’s claimed on Form 8846.

Is the FICA tip credit refundable?
No. It reduces income tax you owe. Unused credit can carry back one year and forward up to 20.

Does the new no tax on tips law change the credit?
No. The new deduction is on the worker’s income tax. FICA still applies to tips, so the employer credit works the same way.

Do service charges count as tips?
No. A charge the guest has to pay is wages, not a tip, for both the credit and the new deduction.