RECOVER YOUR PORTION OF THE BILLIONS OF $$$$ OWED TO BUSINESSES FOR THE FICA TIPS TAX CREDITS.
IRS Code Section 45B
- Tipping Accounts for an Estimated $38 Billion in Taxable Income.
- It is estimated that 80- 90% of Small Businesses in the Food, Beverage, Beauty, and Personal Care Industry, Where Tips are Customary, Never Claim the FICA Tips Tax Credit.
- Median Refund is $101,000
- According to the Federal Reserve Bank of Chicago, More than $11 Billion in Tax Credits Go Unclaimed Annually.
- After three years, the taxpayer has lost another year of this credit.
- Most Payroll Service Providers WILL NOT REDUCE FICA taxes for this Credit.
- If You’re Not Filing Form 8846 With Your Business Return Each Year, You’re Likely Missing It!
- We can Recover the Current Year and the Last Three Years of the FICA Tips Tax Credits!
Use the Calculator Below to Determine How Much You Missed IN ONE YEAR
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Food and Beverage Industries FICA Tips One Year Savings Calculator
Beauty and Personal Care Industries FICA Tips One Year Savings Calculator
Legacy Tax & Resolution Services Can Help
Businesses in industries where employees are tipped face intricacies in payroll and taxes and requirements to report their workers’ tip earnings accurately. While the documentation — Form 8846 — to claim the credit seems simple enough, there are many stipulations and other factors of which owners may not be aware regarding the FICA tax.
Most payroll service providers view it as a liability for the service provider to reduce payroll tax withholdings for this credit.
The most reputable payroll providers will track it and make it easier to calculate, but they view it as the owner’s responsibility to apply for the credit.
Calculating and processing a claim for the FICA Tips Tax Credit is a complicated process; most tax preparers do not have the time to process this credit, even if they are FAMILIAR with the FICA Tips Tax Credit.
Who Does It Apply To?
The FICA tip tax credit is only available to employers with a tipped workforce in the food and beverage industry. Unlike the tip credit under the FLSA, businesses in other industries cannot claim this tax credit.
As a result of the signature of the One Big Beautiful Bill (OBBB), for the first time, effective 12/31/2024, employers in the beauty and personal care industry, including barbering, hair care, nail care, esthetics, body treatment, spas, and salons that employ W-2 staff can claim a dollar-for-dollar tax credit for the employer-paid FICA taxes on employee-reported tips. This provision aligns the beauty industry with the restaurant sector, which has been eligible for this credit since the 1990s.
To be eligible for the FICA tip tax credit, qualifying business in the restaurant and hospitality industries must determine that all non-exempt employees are compensated at least the federal minimum wage for hours worked, which for this tip tax credit is $5.15.
To be eligible for the FICA tip tax credit, qualifying businesses in the Beauty and Personal Care industries must determine that all non-exempt employees are compensated at least the federal minimum wage for hours worked, which for this tip tax credit is $7.25. Also, under the new law, qualifying businesses in the Beauty and Personal Care industries have a requirement that tip income MUST exceed 15% of gross receipts on an annual basis.
Restaurants in jurisdictions or states that don’t allow a tip credit (i.e., Alaska, California, District of Columbia, Minnesota, Montana, Nevada, Oregon, and Washington) don’t utilize the tip credit when paying employees; therefore, the entire portion of tips paid to the employees qualifies for the credit. Restaurants following this model will not benefit nearly as much from the FICA tip credit as those that utilize the tip credit.
Compensation may be totaled from different types of compensation received, such as hourly wages, tips, and gratuities that the staff member records and the restaurant’s meals.
Employees must keep an accurate record of daily tips, whether they come in the form of cash or credit. A total must be provided to the employer on an annual basis. This reported total is used for income tax recording, Social Security payments, and other withholdings. Restaurants must follow up with employees to ensure this information is received.
What Is the FICA Tip Credit?
Employers with employees who earn gratuities must pay taxes on the tips their employees collect from patrons, as the tips are considered income under FICA.
However, qualifying employers may receive an incentive for accurately reporting their workers’ tip earnings: an income tax credit called the FICA Tips Credit, which can save qualifying businesses hundreds of dollars per employee.
The FICA tip credit permits an eligible employer to credit a portion of the FICA taxes paid on certain tip wages against the business’s income taxes (C Corp) or flows through to the business owner (Partnership, S Corp). Sole Proprietorships or LLC taxed as Sole Proprietorships, WITH TIPPED EMPLOYEES, would also take advantage of this credit on their personal return.
This credit equals the employer’s portion of the FICA tax, currently 7.65 percent.
Suppose an employee’s non-tip wages are less than $5.15 per hour. In that case, the credit equals the employer’s share of FICA taxes paid on the employee’s hourly tip wages after reducing that tip wage by the difference between the employee’s non-tip hourly wage and $5.15, according to the U.S. Treasury.
When the OBBB added the Beauty and Personal Care industries it established a new minimum wage rate for just these added industries at $7.25.
What types of business qualify?
Many businesses in the food and Beverage industry qualify for the FICA Tip Credit
but don’t realize it.
Full-Service Restaurants
Establishments where servers take orders and deliver food to customers at tables, including fine dining, casual dining, and family restaurants.
Examples:
Steakhouses, Italian restaurants, diners, etc.
Bars & Nightclubs
Establishments primarily serving alcoholic beverages where bartenders and servers receive tips from customers.
Examples:
Sports bars, cocktail lounges, pubs, nightclubs
Hotels & Resorts
Hospitality businesses where bellhops, room service staff, concierge, and other employees receive tips for the delivery of food or beverages.
Examples:
Luxury hotels, boutique hotels, resorts, motels
Catering Companies
Businesses that provide food service at remote sites where staff receives tips from clients or guests.
Examples:
Wedding caterers, corporate event caterers, private chefs
Coffee Shops & Cafes
Establishments serving beverages and light meals where baristas and counter staff receive tips.
Examples:
Coffee houses, bakery cafes, breakfast spots
Other Qualifying Businesses
Various service establishments where employees customarily receive tips from customers for the service of food or beverages.
Examples:
Cruise ships, casino restaurants, and food and beverage delivery services.
Beauty and Personal Care Industry
New Qualifying Businesses After 12/31/24
Claimed with the 2025 Returns
As part of the 2025 Budget Reconciliation Bill, AKA One Big Beautiful Bill (OBBB) signed into law on July 4, 2025, that enacts numerous changes to the FICA Tips Tax Credit to include the beauty and personal care industries. Many beauty and personal care businesses qualify for the FICA Tip Credit but don't realize it.
Beauty businesses where tipping is a standard practice include:
Hair Salons & Barbershops
Hairstylists, colorists, and barbers frequently receive tips, as do supporting staff like shampoo attendants and assistants.
Nail Salons
Manicurists and pedicurists.
Spas, Salons, and Wellness Centers
Businesses offering various body and spa treatments such as massages, facials, chemical peels, and body wraps.
Fitness Services
Exercise trainers and group fitness instructors.
Esthetics & Skin Care Studios
Professionals providing services like waxing, lash extensions, brow tinting, and airbrush tanning.
Makeup Artists
Whether working in a studio or for specific events (like weddings), makeup artists usually receive tips.
Note: Tipping is generally not expected or allowed for medical professionals (like doctors or registered nurses) who perform medical procedures in a med spa setting, such as Botox or dermal fillers. However, non-medical services within the same facility may still warrant a tip.
Are There Other Qualifications?
Tip Income Requirements
To be eligible for the credit, the tips must meet the following criteria:
The tips were voluntarily received by employees from customers
A customer can’t be compelled to pay it. For instance, a service charge applied to a bill for large parties or catering events that’s then shared among the servers will generally not qualify as a tip that can be included in the creditable tip calculation.
The customer must have the unrestricted right to determine the amount.
The payment can’t be subject to negotiation or dictated by employer policy.
The customer must have the right to determine who receives the payment.
The tips were reported to the employer.
Workers are classified as W-2 employees (not contractors).
The combined wages and tips exceed the federal minimum wage
The FICA Tip Credit only applies to tip income above the minimum wage threshold, not on wages used to satisfy minimum wage obligations.
Employer Tax Responsibility Requirements
This credit is designed to benefit employers who:
Pay the employer portion of FICA taxes (Social Security and Medicare) on reported tips
Accurately report employee tips through payroll, and are reported on your quarterly Form 941s.
Operate in a qualifying industry where tipping is customary and consistent.
Eligible employers can claim the credit annually using IRS Form 8846, reducing their overall federal income tax liability.
Important Note:
The FICA Tip Credit does not refund payroll taxes, but it does offset income tax owed by the business Owner(s)— leading to substantial savings over time. Refund amounts depend on the total reported tips and tax liability.
How Our Process Works
01
Simple Application
Fill out our quick form with basic information about your business.
Transparent Pricing
No upfront cost to check eligibility. Fees are only charged when your credit is filed and always clearly explained before you sign.
02
Process Your Claim
Our tax specialists handle all paperwork and IRS filing requirements. We do all the heavy lifting. From tip data to IRS paperwork, we calculate your potential savings, prepare all documents, and file on your behalf.
03
Tracking and Claim Approval
We work with the IRS to get your claim approved quickly.
IRS Audit Defense Included
If the IRS comes knocking, we answer. Get full audit response support, including documentation compliance checks and peace of mind.
04
Get Funded in Weeks
Receive your credit in weeks, not months.
Advance on Tax Refunds
Eligible businesses can receive funds in advance of IRS payment.
How your FICA Tip Credit gets paid (and when we charge our fees)?
You will know well in advance of filing, which of the below applies to you!
Full Refund
We don’t charge anything at the time of filing. Our fee is deducted once the IRS processes your refund. Or, you can choose an optional advance to get your funds sooner.No upfront payment needed.
Partial Refund + Partial Carry-forward
Part of the credit will be refunded, and the rest will be applied to future taxes.
If your refund is large enough to cover our fee → no payment is due at time of filing. If not, we’ll invoice you when we file the return.Full Credit Carry-forward
Because there’s no refund to deduct from, we’ll invoice you at the time of filing.You can choose to finance your fees and pay over time.Why Us?
“The definition of insanity is doing the same thing over and over and expecting a different result.”
Albert Einstein
Tax Recovery Is Nothing New For Us!
Unlike other Fintech companies that have decided to jump 🦘 on the FICA Tips Tax bandwagon, Legacy has been here all along, helping our clients with this and other areas of Tax Recovery and Tax Planning.
We are just doing it on a much larger scale
Leveling the Playing Field for Small to Medium Businesses.
At Legacy Tax & Resolution Services, we are here to Level The Playing Field for small and medium businesses and help them take advantage of Tax Credits and other Tax Planning Strategies that were previously only available to high-net-worth clients and large companies.
Frequently Asked Questions
Everything you need to know about the FICA Tips Tax Credit
What is the FICA Tip Credit?
Tip credits generally apply only to qualifying employees working in specific industries who receive more than $30 monthly in tips. The Department of Labor also specifies that employers can only apply tip credits to hours spent performing tip-producing work. When workers split shifts between tipped and non-tipped work, employers are responsible for the full minimum wage for the non-tipped hours.
The FICA Tip Credit is a tax credit available to food and beverage establishments and after 12/31/2024, those in the beauty and personal care industries, that allows them to claim a credit against their federal income taxes for the employer’s share of FICA taxes (Social Security and Medicare taxes) paid on employee tips. The credit specifically applies to tips that exceed the amount needed to bring an employee’s wages up to the federal minimum wage rate of $5.15 per hour (the rate used for this credit).
The Fair Labor Standards Act (FLSA) designed the tip credit to help restaurants, bars, hotels, salons, and other types of businesses that rely on tipped employees to cut payroll costs but tightly controls how they can apply it. Where a worker’s combined cash wage and gratuity don’t add up to at least the state minimum wage, the employer needs to pay the remainder. Businesses also can’t apply tip credits to service charges, as these are considered part of the business’s income and not the employee’s earned wages
Before this credit existed, only about 15% of tips were even reported. Now, it not only promotes transparency but gives employers like you a chance to recover thousands in overpaid payroll taxes, without changing how you operate.
How much can my business claim?
Is my business eligible?
How is the credit calculated?
The FICA Tip Credit is calculated in several steps:
- Determine the total tips reported by each employee
- Calculate what the employee would have earned at $5.15 per hour (hours worked × $5.15)
- Subtract the actual wages paid from this amount to find tips used to meet minimum wage
- Subtract the tips used to meet minimum wage from total tips to find eligible tips
- Multiply eligible tips by 7.65% (the combined Social Security and Medicare tax rate)
The result is the FICA Tip Credit amount, which directly reduces the employer’s income tax liability.
Why is $5.15 used as the minimum wage rate for the FICA Tip Credit when the current federal minimum wage is $7.25?
The $5.15 rate is used because it was the federal minimum wage when the Small Business and Work Opportunity Tax Act of 2007 was enacted. This legislation fixed the minimum wage reference point for the FICA Tip Credit at $5.15 per hour, regardless of subsequent increases in the federal minimum wage. This is beneficial for employers as it means more of the reported tips are eligible for the credit calculation than would be if the current $7.25 minimum wage were used.
Calculating a tip credit involves determining the difference between the applicable minimum wage and the cash wage an employer owes a tipped employee. Under federal law, the minimum wage is $7.25 per hour, while the required cash wage for tipped employees is $2.13. The tip credit therefore works out to $5.12.
Originally, the FICA tip credit was enacted in 1993 with the goal of increasing income and employment tax compliance. With this objective in mind, it was intentionally designed to be a generous credit for employers. While you can’t get a credit for taxes paid on the first $5.15 in earnings per hour, you can get a credit for any FICA taxes you paid for tips earned past the $5.15 mark.
The One Big Beautiful Bill (OBBB) added the Beauty and Personal Care industry to the qualifying businesses for the FICA Tips Tax Credit and established the minimum wage rate for the credit at $7.25 for just these added industries. Therefore, while you can’t get a credit for taxes paid on the first $7.25 in earnings per hour, you can get a credit for any FICA taxes you paid for tips earned past the $7.25 mark separately for these newly added industries.
Remember: State Laws Can Vary
Tip credit laws vary considerably across the U.S. A hotel in Texas, Utah, or Alabama can follow the federal rule, which means employee tips can count toward up to $5.12 of the required $7.25 minimum wage. At the same time, a bar in Alaska, California, Minnesota, Montana, Nevada, Oregon, or Washington would end up in hot water with the state Department of Labor (DOL) for applying a tip credit.
Other states, like Massachusetts and Illinois, allow businesses to apply a tip credit to wages but require a higher minimum wage. A Boston bellhop must earn a base pay of $6.75 per hour, while a Chicago stylist is entitled to a minimum wage of $9.
No matter what state you live in, you can use the FICA tip tax credit. However, there are state-by-state differences in other tip-related laws that you must be aware of. In many states, the amount you must pay tipped workers is higher than the federal minimum.
For instance, California doesn’t allow employers to pay less than the state’s minimum wage by counting tips as income. In New York, $5.50 of the employee’s minimum wage earnings per hour can come from tips. This means that the employee can be paid $11 an hour as long as they receive at least $5.50 in tips.
Make sure your business qualifies.
Not all business owners are eligible. Compensate your employees at least the federal minimum wage for all hours worked so that you qualify. If your business is in a state with a higher minimum wage, of course, employees’ wages must meet that standard. Total compensation may include any form of compensation, e.g., hourly wages, tips, service charges, lodging, and meals provided by the business.
Our team handles all these calculations to ensure maximum accuracy and benefit.
Can I claim the credit for past years?
Does claiming this credit trigger an audit?
How long does the process take?
Is there a fee for your service?
How does this credit affect other tax incentives?
Do I need to reduce my wage deduction?
Why is the FICA Tips Tax Credit so underutilized by businesses that are eligible?
In our opinion, there are two reasons for this;
- Payroll services view it as problematic and a potential liability for the payroll service to try to determine the part of the payroll taxes that should not be withheld. Payroll services view this as the business owner’s responsibility to pursue the credit annually.
- Tax Preparers either do not have the time to determine the amount of the credit during tax season or are just not aware of the credit.
There is no single, fixed number of tax credits in the US tax code, as they change with legislation, but there are hundreds of significant tax credits and substantial deductions that are seldom used or highly underutilized, such as the FICA Tips Tax Credit. Tax credits fall into one of three categories: refundable, partially refundable, or non-refundable. The FICA Tips Tax Credit is a non-refundable tax credit.
What's the difference between the FICA Tip Credit and the Minimum Wage Tip Credit?
These are two entirely different concepts:
- FICA Tip Credit: A tax credit that reduces the employer’s income tax liability based on FICA taxes paid on employee tips.
- Minimum Wage Tip Credit: Allows employers to pay tipped employees a lower direct wage (as low as $2.13 federally) and count their tips toward satisfying minimum wage requirements.
The FICA Tip Credit affects tax liability, while the Minimum Wage Tip Credit affects payroll obligations. They are unrelated provisions that happen to both involve tips.
What if my employees don't report all their tips?
Are automatic service charges eligible for the FICA Tip Credit?
No, automatic service charges (such as mandatory gratuities for large parties) are not considered tips for purposes of the FICA Tip Credit. To qualify as a tip, a payment must meet four criteria:
- The payment must be made free from compulsion
- The customer must have the unrestricted right to determine the amount
- The payment cannot be subject to negotiation or dictated by employer policy
- The customer must have the right to determine who receives the payment
Since automatic service charges don’t meet these criteria, they’re treated as regular wages, not tips, and don’t qualify for the FICA Tip Credit.
What happens if I can't use the full FICA Tip Credit in the current tax year?
The FICA Tip Credit is part of the General Business Credit. If you can’t use the full credit in the current tax year (for example, if it exceeds your tax liability), the unused portion can be carried back one year and carried forward for up to 20 years until it is used up. This makes the credit valuable even for businesses with fluctuating profitability.
Do I need to inform employees about the FICA Tip Credit?
No, unlike the Minimum Wage Tip Credit (which requires employee notification), the FICA Tip Credit does not require any notification to employees. It’s strictly a tax matter between the employer and the IRS. However, it’s still important to ensure employees are properly reporting all their tips, as this impacts the credit amount.
How does tip pooling affect the FICA Tip Credit?
Tip pooling doesn’t directly affect the eligibility for the FICA Tip Credit, but it does impact how you calculate it. When tips are pooled and redistributed, you should calculate the credit based on the final amount of tips each employee receives after the pool distribution, not the initial tips received. Proper documentation of the tip pooling arrangement and the final distribution to each employee is important for accurate credit calculation.
Can pooled tips be allocated to qualifying employees for the FICA Tips Tax Credit?
Yes, pooled tips can be allocated to qualifying employees for the FICA Tips Tax Credit provided the arrangement complies with Fair Labor Standards Act (FLSA) regulations. Employers can claim the credit on FICA taxes paid on tips received by employees, including those distributed through a valid tip pool, provided the tips are received from customers.
Key details regarding pooled tips and the FICA tax credit:
- Eligible Participants: Only employees who customarily receive tips (e.g., servers, bartenders, bussers) should participate in a mandatory pool if the employer claims a tip credit.
- Tip Pool Structure: Employers cannot retain any portion of employee tips for themselves.
- Allocated Tips vs. Pooled Tips: While the FICA credit applies to tips received by employees, in large establishments, if reported tips are below 8% of gross receipts, the employer may need to allocate the difference among employees.
- Definition of Tips: Tips must be voluntary payments from customers, not mandatory service charges, to qualify for tax purpose
Key FLSA Tip Pooling Rules
- Prohibition on Management: Managers and supervisors (as defined by the FLSA executive duties test) cannot receive tips from a tip pool, nor can they keep tips from a tip jar. They may only keep tips they personally and solely receive for service.
- Valid Tip Pools: Employers can require sharing tips among “tipped employees,” which the DOL generally defines as those who customarily receive more than $30 a month in tips.
- Tip Credit vs. No Tip Credit:
- With Tip Credit: If the employer pays less than the full minimum wage ($2.13/hr.), the pool can only include traditionally tipped employees.
- No Tip Credit: If the employer pays the full minimum wage ($7.25/hr. or higher), they can establish a “house pool” that includes non-tipped employees (e.g., kitchen staff).
- Employer Record-Keeping: If a mandatory pool exists, the employer must keep strict records of all tips and their redistribution.
- No Retention of Tips: Employers cannot use employee tips for any purpose other than as a tip credit or to fund a valid pool.
State Variations
While the FLSA sets federal standards, many states have stricter laws that prohibit employers from enforcing any mandatory tip pool, regardless of the FLSA’s allowances. For instance, certain jurisdictions, like those in the 9th Circuit, have historically upheld stricter restrictions on mandatory tip pooling.
Legal Consequences
Violating the FLSA by keeping tips or allowing managers to participate can result in the Department of Labor assessing civil money penalties (CMPs) against employers for willful or repeated violations.
Can I claim both a deduction for FICA taxes and the FICA Tip Credit?
No, you cannot double-benefit by both deducting the FICA taxes and claiming them as a credit. When you claim the FICA Tip Credit, you must reduce your deduction for FICA taxes by the amount of the credit claimed. This prevents a double tax benefit for the same expense.
What records should I keep to support my FICA Tip Credit claim?
You should maintain detailed records, including:
- Employee tip reports showing all tips received
- Payroll records showing hours worked and wages paid to each employee
- FICA tax payment records
- Calculations used to determine the credit amount for each employee
- Documentation of any tip pooling arrangements
- Copies of filed Forms 8846 and 3800
These records should be kept for at least three years from the date the tax return was filed or two years from the date the tax was paid, whichever is later.
Is the FICA Tip Credit available for tips received by all employees in a restaurant?
Yes, the credit applies to FICA taxes paid on eligible tips received by any employee in a food or beverage establishment, not just servers. This includes bartenders, bussers, hosts, and other staff who receive tips directly or through tip-sharing arrangements. However, each employee’s tips must be calculated separately to determine the eligible amount for the credit.
Do the new changes including the beauty and personal care industries to the law, apply to salon booth renters and independent contractors?
No. Salon booth renters and independent contractors are self-employed and already pay their own Social Security
and Medicare taxes through self-employment tax. As independent business owners, they have the ability to
deduct their share of these taxes on their personal returns, which is not available to employers of tipped
employees. Therefore, the FICA Tips Tax Credit does not apply to self-employed independent contractors.
Does this credit reduce my employees’ Social Security or Medicare benefits?
No. Employee benefits are based on their total wages and tips reported. This credit does not affect the employees’ share of taxes or their benefit calculations.
Is the FICA tip credit a refundable general business tax credit?
- Non-refundable: The primary function of the credit is to offset an employer’s existing tax bill. If the credit amount is greater than the tax liability, the employer does not receive the difference back as a cash refund.
- Carryback and Carryforward provisions: Unused portions of the credit can be applied to past tax liabilities (carried back one year) or future tax liabilities (carried forward for up to 20 years). This allows businesses to maximize the value of the credit over time, even if they don’t have enough tax liability in the current year to use it all at once.
What is the difference between a refundable and a non-refundable tax credit?
The primary difference is that refundable tax credits can reduce your tax liability below zero, resulting in a refund even in excess of the tax liability on the return, while non-refundable tax credits can only reduce your tax liability to zero. Refundable credits can generate a tax refund even if you owe no taxes, whereas non-refundable credits only generate a refund if there is a tax liability on the return and it has been paid.
On your personal return, your tax liability is listed on Form 1040, Line 24. That is the amount that can be reduced to zero with the FICA Tips Tax Credit and is also refundable if the credit equals or exceeds the tax liability. If the FICA Tips Tax Credit is in excess of the tax liability, the excess would be carried forward to the subsequent year. In that year, you may have a carry-forward tax credit and a new FICA Tips Tax Credit. Again, in that year, you could receive a refund for up to the amount of the paid tax liability in that year.
The FICA Tips Tax Credit is a non-refundable tax credit that can be carried forward up to 20 years. That means, for example, if in the open refund statute year 2022, if you DO NOT have a tax liability and have a FICA Tips Tax Credit for 2022 that can not be utilized, it would be carried forward to 2023.
Why is $5.15 used as the minimum wage rate for the FICA Tip Credit when the current federal minimum wage is $7.25?
The $5.15 rate is used because it was the federal minimum wage when the Small Business and Work Opportunity Tax Act of 2007 was enacted. This legislation fixed the minimum wage reference point for the FICA Tip Credit at $5.15 per hour, regardless of subsequent increases in the federal minimum wage. This is beneficial for employers as it means more of the reported tips are eligible for the credit calculation than would be if the current $7.25 minimum wage were used.
If my business operates as a flow-through entity, how is the credit claimed?
If the qualifying business a pass-through entity (S-corporation or Partnership) for income tax purposes, the credit is reported on each partner/shareholder’s schedule K-1 and flows through to their personal tax returns on Form 3800. The credit is tracked on the corporation’s tax return on Form 3800 if the qualifying business is structured as a C-corporation for income tax purposes.
What qualifies as a tip?
To qualify as a “tip,” the payment from the customer to the employee must meet four conditions:
- A customer can’t be compelled to pay it.
- The customer must have the unrestricted right to determine the amount.
- The payment can’t be subject to negotiation or dictated by employer policy.
- The customer must have the right to determine who receives the payment.
For instance, a service charge applied to a bill for large parties or catering events that’s then shared among the servers (waiter(s), busser(s), bartender(s)) will generally not qualify as a tip that can be included in the creditable tip calculation.
Example A: Restaurant W’s menu specifies that an 18% charge will be added to all bills for parties of 6 or more customers. Customer D’s bill for food and beverages for her party of 8 includes an amount on the “tip line” equal to 18% of the price for food and beverages and the total includes this amount. Restaurant W distributes this amount to the waitresses and bussers. Under these circumstances, Customer D did not have the unrestricted right to determine the amount of the payment because it was dictated by employer policy. Customer D did not make the payment free from compulsion. The 18% charge is not a tip within the meaning of section 3121 of the Code. The amount included on the tip line is a service charge dictated by Restaurant W.
Example B: Restaurant X includes sample calculations of tip amounts beneath the signature line on its charge receipts for food and beverages provided to customers. The actual tip line is left blank. Customer G’s charge receipt shows sample tip calculations of 15%, 18% and 20% of the price of food and beverages. Customer G inserts the amount calculated at 15% on the tip line and adds this amount to the price of food and beverages to compute the total. Under these circumstances, Customer G was free to enter any amount on the tip line or leave it blank; thus, Customer G entered the 15% amount free from compulsion. Customer G and Restaurant X did not negotiate the amount nor did Restaurant X dictate the amount. Customer G generally determined who would get the amount. The amount Customer G entered on the tip line is a tip within the meaning of section 3121 of the Code.
Some restaurants not using the tipped minimum wage and tip credit, may not find the credit as beneficial.
The following restaurants may not utilize the tipped minimum wage or tip credit:
- Quick-service restaurants
- Restaurants in jurisdictions or states that don’t allow a tip credit (i.e., Alaska, California, District of Columbia, Minnesota, Montana, Nevada, Oregon, and Washington.
- Restaurants that have implemented service charges instead of tips.
If you don’t utilize the tip credit when paying employees, the entire portion of tips paid to the employees qualifies for the credit. For example, if you charge your customers a 20% service charge and pay your employees a wage over the regular minimum wage (instead of tipped minimum wage) of $7.25/hour, you can claim a credit for the payroll tax paid on all the tips. Restaurants following this model will not benefit nearly as much from the FICA tip credit as those that utilize the tip credit.
Alaska
As of July 1, 2025, Alaska’s minimum wage is $13.00 per hour, an increase from the previous rate, with future adjustments tied to inflation, ensuring it stays above the federal minimum wage.
California
The California’s statewide minimum wage is currently $16.50/hour but will increase to $16.90/hour on January 1, 2026. However, many cities, counties, and specific industries (like fast-food workers at $20/hour) have higher local minimums..
District of Columbia
The minimum wage in the District of Columbia is $17.95 per hour, effective July 1, 2025, and this rate applies to all workers regardless of employer size, with future increases tied to the Consumer Price Index (CPI).
Minnesota
As of January 1, 2026, Minnesota’s statewide minimum wage increases to $11.41 per hour for all employers, up from $11.13 in 2025, due to annual inflation adjustments. A 90-day training wage for employees under 20 also rose to $9.31/hour. Note that Minneapolis and St. Paul have higher local minimums, with Minneapolis reaching $16.37 in 2026. In St. Paul, MN, minimum wages vary by business size, with large businesses (101+ employees) at $15.97/hour (since Jan 1, 2025), small businesses (6-100 employees) at $15.00/hour (since July 1, 2025), and micro businesses (≤5 employees) at $13.25/hour (also since July 1, 2025), according to the official City of Saint Paul website
Montana
Montana’s minimum wage is $10.55 per hour for most businesses, but a lower rate of $4.00 per hour applies to very small businesses (under $110k sales) not covered by federal law; however, employees must get the higher of federal or state minimum if under federal FLSA, and a bill (HB484) aims to raise the standard rate to $12.06 starting July 1, 2025, removing the small business exception.
Key Details:
- Standard Rate (2025): $10.55/hour.
- Small Business Exception: $4.00/hour for businesses with under $110,000 in gross annual sales, but only if not covered by federal law.
- Federal Minimum Wage: The federal rate ($7.25/hour) applies if it’s higher than Montana’s rate for certain employees.
- Upcoming Change (July 1, 2025): HB484 proposes increasing the rate to $12.06/hour and eliminating the $4 rate for all businesses.
Nevada
As of July 1, 2024, the minimum wage in Nevada is a flat $12.00 per hour for all employers, ending the previous tiered system based on health benefits; this rate is set to continue, as voters approved measures that increased it to this level and ended further automatic adjustments, though it’s subject to review based on cost of living.
Key Details
- Standard Rate: $12.00/hour.
- · Effective Since: July 1, 2024.
- · Tiered System Ended: The previous two-tiered system (with a lower rate for employers offering health benefits) was eliminated by voters.
- · Overtime: Employees earning less than 1.5 times the minimum wage must receive overtime pay (1.5x their rate) for hours over 8 in a day or 40 in a week, notes the Nevada Department of Labor.
- · Meal/Rest Breaks: Nevada law mandates paid 10-minute breaks for every 4 hours worked and an unpaid 30-minute meal break for every 8 hours worked, according to the Nevada Department of Labor.
Oregon
Oregon has a tiered minimum wage system with three rates as of July 1, 2025: $16.30/hour for the Portland Metro area, $15.05/hour for the Standard rate, and $14.05/hour for Non-urban counties, with rates adjusting annually based on inflation after 2026. These rates are set by the Bureau of Labor and Industries (BOLI) and apply to most workers, with special rules for tipped employees.
Current Oregon Minimum Wages (Effective July 1, 2025 – June 30, 2026)
- Portland Metro: $16.30 per hour
- Standard: $15.05 per hour
- Nonurban: $14.05 per hour
Key Points
- Tiered System: Oregon distinguishes between urban, metro, and rural areas for wage setting.
- Annual Adjustments: Rates are adjusted yearly based on the Consumer Price Index (CPI), starting July 1, 2026, for the standard and nonurban rates.
- Official Source: The Bureau of Labor and Industries (BOLI) provides official information.
Washington
Washington’s state minimum wage will increase to $17.13 per hour starting January 1, 2026, up from $16.66 in 2025, based on cost-of-living adjustments, but some cities and counties like Renton and King County have even higher local minimums. Minor employees (ages 14-15) earn a slightly lower rate, and agricultural workers may also have exceptions, with the general rule being that the highest applicable wage (state, local, or federal) must be paid.
Key Figures & Dates:
- Effective Jan 1, 2026: $17.13/hour (Standard)
- Effective Jan 1, 2026: $14.56/hour (Youth 14-15)
- Current (2025): $16.66/hour
Important Considerations:
- Local Wages: Cities like Renton and areas in King County have higher rates than the state minimum.
- · Indexation: The state rate adjusts annually in January based on inflation (CPI-W).
- · Employer Responsibility: Employers must pay the highest applicable wage (state, local, or federal) for all hours worked, including training and meetings, according to the state’s Department of Labor & Industries.
What if my business has multiple owners
No problem! Each owner will need to create an account, upload their personal taxes, and sign an agreement. Only the original owner will need to upload the business documentation.
What if I’ve already filed my returns
No problem! Our accounting team creates and files business amendments for each year you are eligible. The IRS will amend your taxes for the years you qualify and issue a refund check.
What if I already pay my employees above minimum wage
What tips must be reported to the employer?
If an employee fails to report tips to his or her employer, is the employer liable for the employee and employer shares of FICA taxes on those unreported tips?
If an employee fails to report tips to his or her employer, the employer is not liable for the employer share of FICA taxes on the unreported tips until notice and demand for the taxes is made to the employer by the Service. The employer is not liable to withhold and pay the employee share of FICA taxes on the unreported tips.
If the Service determines that an employer’s employees have unreported tips and issues a Section 3121(q) Notice and Demand to the employer, the Service must assess the employer FICA taxes on the unreported tips within 3 years after April 15 of the calendar year following the year in which the Section 3121(q) Notice and Demand is made. For example, if the notice and demand is dated December 31, 2012, the liability is required to be reported on Form 941 for the fourth quarter of 2012, due on January 31, 2013. If the employer timely files Form 941, the period of limitations for assessment ends on April 15, 2016.
As part of the One Big Beautiful Bill (OBBB), employees may deduct qualified tips received in occupations that are listed by the IRS as customarily and regularly receiving tips, including those tips that are eligible for FICA Tax Refund under the FICA Tips Tax Credit. If my employee deducts qualifying tips from their personal income, does this preclude my business from receiving a refund under the FICA Tips Tax Credit?
No, these two programs, while sharing the same goal (encouraging employees to report their tips as taxable income), are mutually exclusive. The fact that employees are reducing their taxable income on their personal returns does not preclude the business owner from claiming the FICA Tip Credit.
Is there a critical new requirement for the FICA Tips Tax Credit as it relates to the Beauty and Personal Care industry, regarding the portion of gross income that must come from tipping?
Yes, there’s an important new requirement for the FICA Tips Tax Credit as it relates to the Beauty and Personal Care industry; tips income must exceed 15% of gross receipts for those services in a calendar year to qualify for the credit. If tips fall below that threshold, the credit doesn’t apply.
Do majority owners who are also employee qualify for the FICA Tips Tax Credit
- Employee Tips: The employer can claim the credit for FICA taxes paid on tips reported by their non-owner employees.
- Owner Tips/Income: Payments to a business owner (such as an S corporation officer/shareholder providing more than minor services) are treated as wages and are subject to FICA taxes, but those tips do not generate a FICA Tip Credit for the business owner themselves or the business with respect to the owner’s tips. Self-employed individuals also pay self-employment tax on their tips, but this is distinct from the employer-side FICA tip credit.
What is the definition of the Restaurant and Hospitality Industry under IRS Section 45B?
What is the definition of the Beauty and Personal Care Industry under IRS Section 45B?
The providing of any of the following services to a customer or client, if the tipping of employees providing such services is customary:
(i) Barbering and hair care.
(ii) Nail care.
(iii) Esthetics.
(iv) Body and spa treatments.
What is the tip credit minimum wage?
What does tip credit mean on an employee's paycheck?
What documentation do I need?
To claim the FICA Tip Credit, employers must file:
- Form 8846: Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips
- Form 3800: General Business Credit (as the FICA Tip Credit is part of the General Business Credit)
These forms must be submitted with the employer’s federal income tax return.
Is FICA Tips Tax Credit a good or bad thing?
How do I know that I haven't already taken advantage of the FICA Tips Tax Credit?
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