FICA tip credit (Section 45B)
How is the FICA tip credit calculated?
Updated · Checked against primary sources
The short answer
For each employee and each month, subtract the tips needed to lift cash wages to $5.15 an hour from total tips. The remainder is creditable tips. Multiply by 7.65%. Example: 100 hours at $2.13 is $213 in wages, so $302 of tips reach the $515 floor; with $2,200 in tips, $1,898 is creditable and the credit is $145.20.
Key takeaways
- Shortfall = max(0, $5.15 x hours - cash wages). Creditable tips = max(0, tips - shortfall).
- Run the test per employee per month. Annual averages overstate the credit when some months are slow.
- Tips above the Social Security wage base ($176,100 in 2025, $184,500 in 2026) earn only 1.45%.
- The most common error is subtracting the full $5.15 x hours from tips and ignoring the cash wage already paid.
Worked examples
All figures verified against Form 8846 line by line.
| Case | Hours | Cash wages | Tips | Shortfall | Creditable | Credit |
|---|---|---|---|---|---|---|
| IRS form example | 100 | $375 ($3.75/h) | $450 | $140 | $310 | $23.72 |
| Server at $2.13 | 100 | $213 | $2,200 | $302 | $1,898 | $145.20 |
| Bartender at $11.00 | 140 | $1,540 | $3,100 | $0 | $3,100 | $237.15 |
The three mistakes that change the number
Subtracting the full floor: taking $515 off the $2,200 server example instead of the $302 shortfall gives $128.90 instead of $145.20. Using $7.25 as the floor gives $129.13. Multiplying tips by 6.2% alone ignores the 1.45% Medicare share.
Step by step
- Pull monthly payroll per tipped employee. Hours, cash wages excluding tips (include any minimum-wage make-up pay), and tips reported.
- Compute the shortfall. $5.15 x hours minus cash wages, floored at zero.
- Compute creditable tips. Tips minus the shortfall, floored at zero.
- Apply 7.65%. Use 1.45% instead for any tips paid after the employee passed the Social Security wage base.
- Report on Form 8846. Line 1 total tips, line 2 tips used to reach the floor, line 3 creditable, line 4 the credit.
Frequently asked questions
- Do I use $5.15 or $7.25?
- $5.15 for food and beverage businesses, per 45B(b)(1)(B) and the 2025 Form 8846. $7.25 applies only to beauty businesses for tax years beginning after 2024.
- What if the employee is paid above $5.15 an hour?
- The shortfall is zero, so all tips on which you paid employer FICA are creditable.
- Does minimum-wage make-up pay count?
- Make-up pay is wages excluding tips, so it reduces the shortfall. In a slow month it can be the difference between zero creditable tips and some.
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Request a free leak scanRelated questions
- Tip creditWhat is the FICA tip credit?
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- Tip creditCan you claim the FICA tip credit for past years?
- Tip creditDoes "no tax on tips" change the FICA tip credit?
Go deeper
- GuideFICA Tip Credit: Section 45B Guide for 2026The FICA tip credit returns 7.65% of most tips you pay payroll tax on. Who qualifies in 2026, what it is worth per location, and the IRS page that errs.
- GuideFICA Tip Credit Calculation: 7 Worked ExamplesHow to calculate the FICA tip credit: the $5.15 formula, seven worked examples with exact math, a Form 8846 roll-up, and the mistakes ranking guides make.
- GuideHow to Claim the FICA Tip Credit for Prior YearsMissed the FICA tip credit? Which years are still open in late 2026, how to amend with Form 8846 by entity type, and why the 90-day refund claim is a myth.
Terms on this page
- Creditable tips
- Tips on which the FICA tip credit is computed: an employee's tips for the month minus the amount needed to bring their cash wage up to $5.15 an hour. Never less than zero.
- Form 8846
- The IRS form used to claim the FICA tip credit. Line 1 is tips, line 2 the tips needed to reach the $5.15 floor, line 3 creditable tips, and line 4 the credit at 7.65%.
- Social Security wage base
- The annual earnings cap for the 6.2% Social Security tax: $176,100 in 2025 and $184,500 in 2026. Tips paid after an employee passes it earn only the 1.45% Medicare portion of the tip credit.
Sources
- IRS Form 8846 (2025) and instructions
- 26 U.S. Code 45B (Cornell LII)
- SSA: Contribution and benefit base
Cite this page
Pavado, “How is the FICA tip credit calculated?”, https://www.pavadotech.com/restaurants/questions/how-is-the-fica-tip-credit-calculated, updated 2026-09-23.