The FICA Tip Credit: Money Many Restaurant Owners Leave on the Table

By Jeff Bibby, CPA · October 16, 2026 · 3 min read

When your servers and bartenders report tips, you pay the employer's share of Social Security and Medicare on those tips: 7.65%, the same as on wages. Congress decided restaurants shouldn't carry all of that, so there's a federal credit that gives a large share of it back. It's called the FICA tip credit, and it's claimed on Form 8846.

It's a credit, not a deduction, so it reduces your tax dollar for dollar. And a lot of owners have never claimed it.

Who qualifies

Food and beverage businesses where tipping is customary: restaurants, bars, cafes, and delivery or takeout operations with tipped staff. Beginning with 2025, beauty service businesses (barbers, salons, nail and spa services) can qualify too.

How it's calculated

The credit is the employer's 7.65% FICA on tips, but only on tips above the amount needed to bring an employee up to the federal minimum wage. For this credit, that minimum wage is still frozen at $5.15 an hour, the rate in effect back in 2007.

A simple example: a server works 30 hours a week, earns a $3.89 tipped wage from you and reports $600 in tips.

To reach $5.15 an hour, the server needs $1.26 an hour from tips, or $37.80 for the week.
Tips above that: $600 minus $37.80, or $562.20.
Credit: 7.65% of $562.20, or about $43 for that one employee, for one week.

Multiply that by your whole tipped staff for a year and it's often thousands of dollars. Busy restaurants can see five figures.

One catch: you reduce your payroll tax deduction by the amount of the credit, so you don't get both. The credit is still worth more than the deduction it replaces.

Why owners miss it

Payroll companies process the tips but usually don't calculate the credit.
Tax preparers who don't work with restaurants often don't ask.
It's part of the general business credit, which can feel complicated. If you can't use it all this year, it carries forward.

What we need to calculate it

Your annual payroll report broken out by employee: hours, cash wages and reported tips by pay period. Jette Payroll's reports have all of it. If you use another provider, ask for a payroll summary with tips by employee.

Can I go back and claim it for past years?

Often, yes. You can usually amend returns for open years, generally the last three. If you've run a restaurant for years and never claimed it, that's the first thing we'd look at.

Want help with this? Send us your annual payroll report and we'll tell you what the credit is worth.

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This article is general information, not tax or legal advice for your specific situation. Tax rules change; talk with us before acting on it.