Employer Social Security Tax Credit on Tips (Section 45B)
Internal Revenue Service
7.65% of qualifying tips
Turn tip taxes into a federal credit
A federal income tax credit for food and beverage employers equal to the employer's share of FICA Social Security and Medicare taxes paid on employee tip income that exceeds the federal minimum wage ($7.25/hr). Restaurants, bars, and catering businesses pay 7.65% employer FICA on all tip income — but the portion attributable to wages above the minimum wage earns a dollar-for-dollar credit against federal income tax. For a busy restaurant with $500K/yr in reported tips, the credit routinely generates $20,000–$40,000 annually with minimal additional compliance burden.
- Funding type
- Tax Credit
- Level
- Federal
- Amount
- 7.65% of reported employee tips that exceed the federal minimum wage ($7.25/hr) when applied against hours worked. The excess-tip formula: [total tips received] minus [tips equivalent to federal minimum wage for hours worked]. The 7.65% is the combined employer Social Security (6.2%) and Medicare (1.45%) FICA rate. Claimed as a general business credit (Form 8846) against federal income tax.
- Realistic amount
- A restaurant with 20 tipped employees averaging $15/hr in tips and 40 hrs/week each produces approximately $468K/yr in t…
- Deadline
- Ongoing — claimed annually on federal income tax return (Form 8846). No expiration. Tips must be reported by employees on Form 4070 (or equivalent) to the employer.
- Status
- active
- States
- Nationwide
- Payment model
- tax offset
Who qualifies
- Eligible employers: persons engaged in a business involving the sale of food or beverages for consumption on the premises (restaurants, bars, cafes, hotel food service, catering on-premises)
- Employees must receive tips from customers in the course of the employer's food or beverage sales — the tips must be paid voluntarily by customers, not employer-mandated service charges
- Employer must have paid FICA (Social Security and Medicare) taxes on the employee tip income
- Only the FICA paid on tips ABOVE the federal minimum wage ($7.25/hr) counts — tips that merely substitute for minimum-wage payment do not generate credit
- Employee must have reported tips to the employer (Form 4070 or equivalent IRS-approved substitute)
- Applicable to businesses structured as C-corps, S-corps, partnerships, or sole proprietors — any for-profit business form with tipped food/beverage service
- The credit reduces allowable business deductions: the employer cannot deduct the FICA taxes that generate the credit (avoid double benefit)
What it covers
Eligible expenses
- Employer share of Social Security (6.2%) on qualifying excess employee tips
- Employer share of Medicare (1.45%) on qualifying excess employee tips
- Applies to tips from: food and beverage service staff (servers, bartenders, bussers who receive tip shares, baristas)
Ineligible expenses
- FICA on employee tips below the federal minimum wage rate ($7.25/hr equivalent) — those tips are just paying minimum wage, not generating a credit
- Mandatory service charges (automatic gratuities that the employer controls and pays out as wages — these are wages, not tips, and don't qualify)
- FICA on non-tip wages
- Tips received in businesses NOT primarily engaged in food and beverage service (hair salons, hotel bellhops, valet — not eligible under §45B)
How to apply
-
1
Establish employee tip reporting procedures
Implement a daily tip reporting system. Employees must report tips to the employer by the 10th day of the month following the month tips were received (Form 4070 or employer-equivalent). IRS TRAC and TRDA programs provide safe harbors for tip compliance audits — consider enrolling.
~4 hrs
-
2
Calculate qualifying excess tips for each employee
For each tipped employee: (total reported tips) minus (federal minimum wage × hours worked). This is the 'excess tip' amount. Sum across all tipped employees for the year. Only excess tips generate the credit; minimum-wage-equivalent tips do not.
~3 hrs
-
3
Calculate the credit amount
Multiply total excess tips by 7.65% (the combined employer FICA rate: 6.2% Social Security + 1.45% Medicare). This is your Form 8846 credit amount. Note: if your average employee wage (including tips) is already above minimum wage for all hours, your excess tip pool equals total tips.
~2 hrs
-
4
File Form 8846 and coordinate with Form 3800
Complete IRS Form 8846 (Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips). The credit flows through Form 3800 (General Business Credit) to your federal income tax return. Pass-through entities (S-corps, partnerships) pass the credit to owners via Schedule K-1.
~2 hrs
Industry & certifications
NAICS codes: 722511, 722513, 722514, 722515, 722410, 722330
Auto-grat (mandatory service charges) does NOT generate §45B credit — those are wages, not tips. Many restaurant accountants miss this distinction. Voluntary tips only. Keep the distinction clean in your POS system categories.
Deadline & timing
The credit is permanent law — no expiration date. It has existed since 1993. Form 8846 must be filed with the employer's federal income tax return for the year the FICA taxes are paid. Employers must have received employee tip reports (Form 4070 or equivalent) to substantiate the credit. The credit flows through Form 3800 (General Business Credit) for pass-through entities.
Programs that stack well
- Federal Section 45s Employer Paid Family Medical Leave Credit
Related programs
Last reviewed 2026. GrantCompass is an independent funding-discovery tool and is not affiliated with any government agency. Always confirm details on the official program page.