FICA Tip Credit for Restaurants

As a restaurant owner, you pay FICA (Social Security + Medicare) taxes on your employees' reported tips. What many owners don't realize is that the IRS offers a dollar-for-dollar tax credit for the employer's share of FICA taxes paid on tips that exceed the federal minimum wage. This is the FICA tip credit, and it can save you thousands every year.

How the FICA Tip Credit Works

Under IRC Section 45B, restaurant employers can claim a credit for the employer's portion of FICA taxes (7.65%) paid on tips that exceed the amount needed to bring an employee's cash wage up to $5.15 per hour (the rate used for credit calculation purposes).

The calculation works in three steps:

1. Determine the excess tips: Total tips received minus the amount needed to reach $5.15/hour
2. Calculate the employer FICA: Multiply the excess tips by 7.65%
3. Claim the credit: The result is a dollar-for-dollar reduction in your federal tax liability

Who Qualifies?

The FICA tip credit is available to any employer whose employees receive tips, but it's most valuable for:

• Full-service restaurants with tipped servers, bartenders, and bussers
• Quick-service restaurants with tip jars or digital tipping
• Bars, cafes, and catering companies
• Hotels with tipped food service staff

The credit applies regardless of whether you pay the federal tipped minimum wage ($2.13) or a higher state minimum wage. However, the calculation adjusts based on the actual cash wage paid.

Common Mistakes Restaurant Owners Make

• Not claiming it at all: Many CPAs simply don't include it on the return — it requires Form 8846
• Not going back to claim missed credits: You can amend up to three years of returns to capture missed credits
• Excluding part-time employees: Even part-time tipped employees generate credits

Combining with Other Restaurant Tax Strategies

The FICA tip credit is just one piece of a comprehensive restaurant tax strategy. Smart restaurant owners combine it with:

• Work Opportunity Tax Credit (WOTC) for qualifying new hires
• Commonly missed deductions for food waste, uniforms, and training
• Cost segregation on restaurant build-outs and leasehold improvements
• Entity structuring for multi-location operators

Read our full breakdown of how to maximize your FICA tip credit or explore our restaurant tax strategy overview.