Every restaurant owner who runs tips through payroll pays employer Social Security and Medicare on money that went straight from the customer to the server. Many of them never claim the credit that gives a large share of it back. That is not a tax strategy. That is a donation.
The credit is in IRC 45B and it is claimed on Form 8846, Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips. Here is how it works, using the 2025 form and instructions.
What the credit is
Section 45B(a) creates a credit, as part of the general business credit under IRC 38, equal to the "excess employer social security tax" you paid or incurred during the year. Section 45B(b)(1) defines that as tax you paid under IRC 3111 on tips an employee received during a month, to the extent the tips are deemed paid by you under IRC 3121(q) and exceed the amount needed to bring the employee's cash wages for that month up to the minimum wage the statute specifies.
Translated: you get credit for the employer FICA you paid on tips, except for the slice of tips that is treated as covering the minimum wage.
Which businesses qualify
Under section 45B(b)(2), only tips received in connection with certain services count. For restaurants, it is tips for providing, delivering or serving food or beverages for consumption, where tipping of the employees delivering or serving food or beverages is customary.
In 2025, Congress expanded the list. For tax years beginning after 2024, the credit also covers tips for barbering and hair care, nail care, esthetics, and body and spa treatments, where tipping is customary. The 2025 Form 8846 reflects that change. Salon owners should read our guide on salons, barbershops and the IRS, because their minimum wage figure is different.
The $5.15 rule for food and beverage employers
This is the part people get wrong. For food or beverage establishments, section 45B(b)(1)(B) uses the federal minimum wage as in effect on January 1, 2007, determined without regard to the tip credit provision of the Fair Labor Standards Act. The 2025 Form 8846 instructions state that figure as $5.15 an hour.
So for each employee, each month, you compute what the employee would have earned at $5.15 an hour for the hours worked, compare it to the cash wages you actually paid (excluding tips), and reduce the creditable tips by any shortfall.
The instructions give this example for October 2025. A food or beverage employee worked 100 hours, received $450 in tips and was paid $375 in wages, which is $3.75 an hour. At $5.15 an hour the wages would have been $515. The $140 difference ($515 minus $375) reduces the tips, so only $310 of that month's tips count toward the credit.
If you pay tipped employees $5.15 an hour or more in cash wages, the instructions say to enter zero on line 2. In that case every reported tip dollar is creditable.
Beauty service employers use a different number. The instructions apply the federal minimum wage currently in effect, $7.25 an hour, to them.
Walking through the form
| Line | What goes there |
|---|---|
| 1 | Tips received by employees for qualifying services on which you paid or incurred employer Social Security and Medicare tax during the tax year. |
| 2 | Tips not subject to the credit: the monthly minimum wage shortfall, computed employee by employee. |
| 3 | Creditable tips: line 1 minus line 2. |
| 4 | Line 3 times 7.65 percent, with an adjustment if any tipped employee exceeded the Social Security wage base. |
| 5 | Credit passed through from partnerships and S corporations. |
| 6 | Total. Partnerships and S corporations report it on Schedule K; everyone else carries it to Form 3800. |
The wage base adjustment
The 7.65 percent rate on line 4 combines the 6.2 percent Social Security rate and the 1.45 percent Medicare rate. Social Security tax stops at the annual wage base. The 2025 instructions say that if any tipped employee's wages and tips exceeded the 2025 Social Security wage base of $176,100, you check the box on line 4 and attach a computation that applies only the 1.45 percent Medicare rate to the tips above the base.
Fiscal-year filers get a note too: the instructions cite the 2026 Social Security wage base of $184,500 for wages and tips paid in 2026. The wage base test is made for each calendar year.
The Additional Medicare Tax of 0.9 percent does not enter the computation. It is imposed only on the employee, and there is no employer share, so it has no effect on the credit.
The catch: you lose part of your deduction
Section 45B(c) says no deduction is allowed for any amount taken into account in determining the credit. The instructions tell you to reduce your income tax deduction for employer Social Security and Medicare taxes by the line 4 amount. You do not get a deduction and a credit for the same dollar.
The credit is still usually worth more, because a credit reduces tax dollar for dollar and a deduction only reduces income. But your return has to show both sides correctly. A credit claimed with the full payroll tax deduction left in place is an easy adjustment for an examiner.
You can claim it late, or elect out
Section 45B(d) lets you elect not to claim the credit for any year. The Form 8846 instructions say you can claim the credit, or elect not to claim it, any time within 3 years from the due date of your return, on either your original return or an amended return. If you skipped the credit on prior returns, look at those years now.
Partnerships and S corporations must file Form 8846 to claim the credit and pass it through. Owners who get the credit only from a pass-through can generally report it directly on Form 3800 without filing their own Form 8846.
Because it is a general business credit, the usual Form 3800 limitations apply. A restaurant with little income tax liability may not use the full credit in the year it arises.
Unreported tips and the credit
Here is a detail that matters when the IRS comes after unreported tips. Section 45B(b)(1)(A) counts tips deemed paid by the employer under section 3121(q) "without regard to whether such tips are reported under section 6053." If the IRS assesses employer FICA on unreported tips, the employer tax you pay on that assessment can feed the credit too. We explain those assessments in our guide to IRS aggregate tip assessments.
What you need in the file
The credit is computed monthly, per employee, so your records must be able to produce, for each tipped employee and each month: hours worked, cash wages excluding tips, reported tips, and year-to-date wages for the wage base check. If your payroll system cannot produce that, the credit computation becomes an estimate, and estimates lose audits. The same records support your basic tip compliance, covered in our guide to the owner's tip reporting duties.
Service charges do not belong in the credit. The Form 8846 instructions point to Revenue Ruling 2012-18 for the difference between tips and service charges. A mandatory gratuity is a wage, not a tip, and it is not part of line 1.
If your restaurant is carrying old payroll problems, the firm's payroll tax page explains how it approaches them.
You already paid the tax. The credit is the part of the law that pays some of it back. Claim it, and claim it correctly.