Is the FICA tip credit the same as the tip credit in minimum wage law?

No. The FLSA tip credit lets an employer pay a cash wage as low as $2.13 and count up to $5.12 of tips toward the $7.25 minimum wage. The FICA tip credit is an income tax credit for the payroll tax paid on tips. A restaurant can use both, one, or neither.

Do tips have to be reported to qualify?

The credit is based on tips on which the employer paid FICA. The statute applies without regard to whether the tips were reported under section 6053, but in practice the employer only pays FICA on tips it knows about, so reported tips drive the number.

Do service charges or auto-gratuities count?

No. The IRS treats automatic service charges and distributed auto-gratuities as non-tip wages, so they are excluded from creditable tips.

How much is the FICA tip credit worth?

It depends on tip volume and cash wages. In a worked example of 12 tipped employees each working 120 hours and earning $2,400 in tips a month at a $2.13 cash wage, the credit is about $22,446 a year before the lost deduction. Run your own numbers in the calculator.

FICA tip credit (Section 45B)

What is the FICA tip credit?

Updated September 23, 2026 · Checked against primary sources

The short answer

The FICA tip credit, Section 45B of the tax code, is a federal income tax credit for food and beverage businesses equal to the 7.65% employer Social Security and Medicare tax paid on employee tips, except the tips needed to bring each employee's pay up to $5.15 an hour. It is claimed on Form 8846 and can be claimed on amended returns for about three years.

Key takeaways

Credit rate: 7.65% (6.2% Social Security + 1.45% Medicare) on creditable tips (Form 8846).
The $5.15 floor is the federal minimum wage as of January 1, 2007, frozen by statute. It is not $7.25 for restaurants.
From tax years beginning after 2024, beauty businesses also qualify, with a $7.25 floor.
It is nonrefundable: unused credit carries back 1 year and forward up to 20.
You lose the income tax deduction for the FICA the credit covers, so the net benefit is smaller than the credit.

Who qualifies

Businesses that provide food or beverages for consumption on or off premises where tipping is customary qualify, including delivery. Since tax years beginning after December 31, 2024, barbering and hair care, nail care, esthetics and body and spa treatments also qualify, under the 2025 law known as the One Big Beautiful Bill Act (Form 8846).

Paying more than $5.15 an hour does not disqualify you. It helps: when every hour is paid at or above the floor, every reported tip dollar is creditable. That makes the credit larger, not smaller, in states such as California and Washington that do not allow a tipped minimum wage.

Why the IRS web page says $7.25

The IRS's own FICA tip credit page describes the floor as $7.25. The statute, 45B(b)(1)(B), and the 2025 Form 8846 instructions both say $5.15 for food and beverage businesses, and $7.25 only for the newly added beauty businesses (26 U.S.C. 45B). Follow the statute and the form, and confirm with your preparer.

Frequently asked questions

Is the FICA tip credit the same as the tip credit in minimum wage law?: No. The FLSA tip credit lets an employer pay a cash wage as low as $2.13 and count up to $5.12 of tips toward the $7.25 minimum wage. The FICA tip credit is an income tax credit for the payroll tax paid on tips. A restaurant can use both, one, or neither.
Do tips have to be reported to qualify?: The credit is based on tips on which the employer paid FICA. The statute applies without regard to whether the tips were reported under section 6053, but in practice the employer only pays FICA on tips it knows about, so reported tips drive the number.
Do service charges or auto-gratuities count?: No. The IRS treats automatic service charges and distributed auto-gratuities as non-tip wages, so they are excluded from creditable tips.
How much is the FICA tip credit worth?: It depends on tip volume and cash wages. In a worked example of 12 tipped employees each working 120 hours and earning $2,400 in tips a month at a $2.13 cash wage, the credit is about $22,446 a year before the lost deduction. Run your own numbers in the calculator.

Run your own numbers

CalculatorFICA Tip Credit CalculatorEstimate the Section 45B FICA tip credit from three payroll numbers: tips, tipped hours and average cash wage. Creditable tips are tips minus what it takes to reach $5.15 an hour; the credit is 7.65% of that.

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Terms on this page

Section 45B: The Internal Revenue Code section that creates the FICA tip credit: a federal income tax credit for the employer share of Social Security and Medicare tax paid on employee tips above the $5.15 per hour floor.
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%.
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.

Sources

Cite this page

Pavado, “What is the FICA tip credit?”, https://www.pavadotech.com/restaurants/questions/what-is-the-fica-tip-credit, updated 2026-09-23.