FICA Tip Credit (Section 45B): Who Qualifies in 2026 and How to Claim It

The FICA tip credit, also called the FICA tax tip credit or the 45B credit, is a federal income tax credit for the employer share of FICA tax paid on tips. It is not the FLSA tip credit, which lets an employer count tips toward the minimum wage and pay a cash wage as low as $2.13 an hour (DOL Fact Sheet #15), and it is not the R&D credit that offsets FICA on Form 941. The two tip credits interact, though: the lower the cash wage, the more tips go to reaching the 45B floor, and the smaller the FICA tip credit.

The biggest change in years came with P.L. 119-21, signed July 4, 2025. Section 70201(e), titled “Extension of Tip Credit to Beauty Service Business,” opened the credit to barbering and hair care, nail care, esthetics, and body and spa treatments for tax years beginning after December 31, 2024. For a calendar-year salon, that starts with the 2025 return.

Who qualifies in 2026

Four more conditions come straight from section 45B and the IRS tip rules:

• The tips belong to employees. The credit is measured by employer Social Security and Medicare tax, so tips received by independent contractors, such as properly classified booth renters, add nothing.
• Tipping is customary for that service. The statute applies the test to each line of business.
• They are tips, not service charges. The IRS treats a mandatory charge added to the bill as wages paid by the employer, per its tip recordkeeping page.
• You paid the FICA. Tips count once employer tax has been paid on them, reported or not. For tips an employee never reported, the employer owes its share only after an IRS notice and demand under section 3121(q).

How the credit is figured

Form 8846 (the 2025 revision is current) works through it in four lines, employee by employee and month by month:

1. Line 1: tips your employees received for qualifying services on which you paid or incurred employer Social Security and Medicare tax during the tax year.
2. Line 2: the tips that do not count. For each employee and month, multiply hours by $5.15 (food and beverage) or $7.25 (beauty services) and subtract the cash wages you actually paid, excluding tips. If you paid at least the floor rate in cash wages, this is zero.
3. Line 3: creditable tips, line 1 minus line 2.
4. Line 4: creditable tips times 7.65%. If an employee's wages and tips passed the Social Security wage base ($184,500 for 2026, per Publication 15; see the 2026 FICA tax limit), tips above it earn only 1.45% for Medicare; attach that computation.

The IRS example on the form: a food or beverage employee worked 100 hours in October 2025 at $3.75 an hour ($375) and received $450 in tips. At $5.15 an hour the wages would have been $515, so $140 of tips went to reaching the floor and $310 were creditable.

Two consequences follow. The floors are federal: if state law already requires you to pay at least $5.15 an hour (food and beverage) or $7.25 an hour (beauty services) in cash wages, line 2 is zero and every reported tip is creditable. And the 0.9% Additional Medicare Tax has no employer share, so it has no effect on the credit. Once you claim it, reduce your deduction for employer Social Security and Medicare tax by the line 4 amount; the law allows no deduction for the same dollars.

Worked example: one month, three pay setups

Same hours, same cash wage, same tips: the stylist's higher floor takes $252 more of the tips out of the credit. Paying $8.00 an hour clears both floors, so all $2,400 counts. Twelve months like the server's add up to $2,076.48 of credit, and the business gives up the deduction for that same $2,076.48 of employer FICA.

Claiming it on Form 8846

• Pass-through entities. Partnerships and S corporations must file Form 8846 to claim the credit and report it to owners on Schedule K. Other filers carry it to Form 3800, Part III, line 4f.
• General business credit rules. The credit reduces income tax, not payroll tax. What you cannot use carries back 1 year and forward up to 20 years under section 39.
• Three-year window. Per the form, you can claim the credit, or elect not to, within 3 years from the return's due date on an original or amended return. A salon that filed its 2025 return without it can still amend; a C corporation on extension has until October 15, 2026 to file its 2025 Form 1120.
• Choosing not to claim. Section 45B(d) lets you elect out for any year. Because the credit replaces a deduction for the same FICA dollars, whether it helps in a given year depends on your tax position, which is a question for your tax preparer.

How it fits with “no tax on tips”

P.L. 119-21 also created a deduction for workers in section 224: up to $25,000 a year of qualified tips for 2025 through 2028, reduced by $100 for every $1,000 of modified adjusted gross income above $150,000 ($300,000 on a joint return), available whether or not the worker itemizes. Qualified tips must be voluntary cash or charged tips in an occupation on the Treasury list; the final regulations issued April 10, 2026 list more than 70 occupations, including a personal appearance and wellness category.

The deduction does not change the credit. The 2026 W-2 instructions confirm that tips of $20 or more a month remain subject to income tax withholding and to both the employer and employee shares of Social Security and Medicare tax, so the employer FICA the credit is measured by is still paid.

What did change is reporting. Section 6051(a)(18) now requires the W-2 to show cash tips and the tipped occupation:

• Tax year 2025: Notice 2025-62 gave employers penalty relief for not reporting cash tips and occupations separately, and 2025 Forms W-2 were not redesigned. The IRS encouraged employers to give tipped workers the information another way, such as a portal or a separate statement.
• Tax year 2026: the Form W-2 reports total cash tips reported to the employer in box 12 with code TP, and up to two Treasury Tipped Occupation Codes in new box 14b, using 000 if any tips came from an occupation not on the list.

For a payroll team, both rules run on the same data: tips by employee and month, kept apart from service charges, with an occupation code on file for each tipped employee.

Records to keep

• Each employee’s monthly tip reports. Employees owe them by the 10th of the following month, and the IRS requires employers to keep them.
• Hours worked and cash wages paid, by employee and by month. These drive line 2 of Form 8846.
• Point-of-sale records that separate customer tips from service charges and automatic gratuities.
• Forms 941 showing Social Security and Medicare tax on tips, and Forms W-2 with Social Security tips in box 7 and, for 2026, code TP in box 12.
• Form 8027 and any tip allocations, if you run a large food or beverage establishment. Its instructions call for keeping records 3 years after the due date.
• Each Form 8846 you file and the separate computation for any employee whose pay passed the Social Security wage base.
• Any IRS notice and demand for FICA on unreported tips, with proof of payment.
• If one business earns both kinds of tips, a record of which tips came from food or beverage service and which from beauty services, since the floors differ.

A large food or beverage establishment, where tipping is customary and the employer normally had more than 10 employees on a typical business day in the prior year, also files Form 8027 each year and allocates tips when reported tips fall below 8% of gross receipts, per the Form 8027 instructions and the IRS tip page.

Tip reporting runs through payroll

Every number on Form 8846 comes out of payroll: reported tips, hours, cash wages and the FICA paid on tips. BEG Managed Payroll runs tip reporting inside the payroll system you already use, from $25 per employee per month: reported tips processed each pay period, tips kept separate from service charges, Form 941 and year-end Forms W-2. Your tax preparer claims the credit from that data. The restaurant payroll guide covers the tipped minimum wage and tip pooling side, and BEG has payroll pages for restaurants and salons and spas.

Other credits built on wages, from the R&D payroll election to the paid leave and retirement plan credits, are compared in the 2026 guide to payroll tax credits.

Sources: 26 U.S.C. 45B; Public Law 119-21, section 70201 (July 4, 2025); IRS, Form 8846 (2025); IRS, About Form 8846; IRS, Tip recordkeeping and reporting; 26 U.S.C. 224; 26 U.S.C. 6051; IRS, 2026 General Instructions for Forms W-2 and W-3; IRS, IR-2025-110 and Notice 2025-62; IRS, IR-2026-49, final regulations on tipped occupations; IRS, Instructions for Form 8027 (2025); IRS, Publication 15 (2026); 26 U.S.C. 39; U.S. Department of Labor, federal minimum wage history; U.S. Department of Labor, Fact Sheet #15, tipped employees. Rules and figures checked against these sources on September 25, 2026. This is general information, not tax advice for your situation. Tax services are provided by licensed tax professionals under a separate engagement agreement. BEG does not provide tax advice.