FICA Tip Credit: Section 45B Now Reaches Salons and Barbershops

Every dollar your staff collect in tips is wage income, and you pay the employer share of Social Security and Medicare tax on it. Section 45B hands part of that payroll tax back. The IRS describes Form 8846 as the way certain food and beverage establishments claim a credit for the Social Security and Medicare taxes an employer paid on employee tips, and it confirms the credit is "part of the general business credit".^[1] That distinction matters: you are not deducting an expense, you are reducing tax owed dollar for dollar. The agency states that employers may be eligible for the FICA tip credit under section 45B "for certain tips on which the employer paid Social Security and Medicare taxes".^[2] The word certain carries real weight there, because not every payment a customer leaves behind counts as a tip. Employers who treat this as a filing season afterthought tend to lose it, which is why it belongs inside your payroll services routine rather than a once a year scramble.

For decades this was, in practice, a restaurant credit. That changed when the WFTC amended section 45B to extend the credit past food or beverage establishments.^[3] The credit now takes in tips received by employees who perform several personal care services, which pulls a wide slice of the South Florida grooming and wellness economy into a benefit it previously had no claim to. If you operate a salon, a barbershop, a nail studio, or a spa, and your staff receive tips that run through your payroll, Section 45B is now a live question for you. The same IRS guidance points employers to Form 8846 and its instructions for how to calculate and claim the credit.^[3] Restaurants keep their long standing claim, and we work with both groups: see our restaurant and food service accounting practice and our salon and personal services accounting practice.

This is where most of the money is won or lost. A tip is voluntary: the customer decides whether to pay it and how much. A service charge is imposed by the business, and the customer has no say. The IRS treats a charge the customer must pay as a non-tip wage rather than a tip, and it is explicit that an employer cannot use those non-tip wages when computing the Section 45B credit, because they are not tips at all.^[4] Those amounts still carry Social Security tax, Medicare tax, and federal income tax withholding, so you pay the payroll tax without earning any credit on it.^[4] A business that funnels a growing share of its gratuity revenue through automatic charges is quietly shrinking its own credit base every year.

The credit is built on what your employees report to you, so the reporting process is the credit process. An employee who receives cash tips of $20 or more in a calendar month has to report the total to their employer, and that written report is due by the tenth day of the following month.^[5] Those reports are what you use to withhold correctly, what you use to pay the employer share, and ultimately what substantiates the tips your credit is computed on. When reports arrive late, arrive incomplete, or never arrive at all, the credit thins out with them. Practically, that means a written monthly tip statement from every tipped employee, collected every month and retained, not an informal understanding at the end of a shift.

The credit tracks the employer half of FICA. Social Security is charged at 6.2% on the employer and 6.2% on the employee, or 12.4% in total, and Medicare runs at 1.45% each side, or 2.9% in total.^[6] The credit follows the employer portion you actually paid on qualifying tips, which is why an accurate payroll record, and not an estimate, is the starting point. One limit shapes the arithmetic at the top end: only Social Security carries a wage base, and for earnings in 2026 that base limit is $184,500 and Medicare carries no wage base at all.^[7] A long tenured, high earning tipped employee can therefore stop generating employer Social Security tax partway through the year even as Medicare keeps accruing. Because the computation depends on per employee payroll detail, we handle it inside business tax return preparation rather than as a standalone worksheet.

Form 8027 is a separate obligation from the credit, and plenty of operators meet one without realizing they have tripped the other. An employer running a large food or beverage establishment must file Form 8027 each calendar year to report receipts and reported tips, and may also be required to allocate tips among employees.^[8] The IRS defines that establishment by three conditions together: tipping is customary, food or beverages are consumed on the premises, and the employer normally employs more than ten people whose combined hours average over 80 on a typical business day.^[8] Note that the head count test is about total staff, not only tipped staff, which is how a mid size Miami restaurant with a large kitchen crosses the line sooner than its owner expects.

There is a protective rule here that is widely misunderstood as a loophole. If an employee fails to report tips to you, you are not liable for the employer share of Social Security and Medicare tax on those unreported tips until the IRS makes a notice and demand for the tax on you.^[9] That sounds like relief, and in a narrow sense it is, but read it against the credit: tax you never paid is tax you can never claim a credit for. Chronic underreporting therefore costs you twice, first in the credit you forfeit and then in the exposure that a notice and demand can create later. If a notice does land, that is representation territory, and an IRS representation with an Enrolled Agent approach beats improvising a response.

Assume an examiner will ask you to prove the line you drew between tips and service charges. The IRS says that in an examination it may ask the employer to show how sales subject to service charges are distinguished from sales subject to tipping, and that examiners may request Point of Sale records, including the summary reports covering sales transactions.^[10] That is a documentation standard, not a conversation, and it is decided by how your point of sale system was configured long before anyone asked. Clean books make this a short meeting: see small business accounting.

The employer credit is often confused with the separate deduction employees may claim on their own returns for qualified tips; those are different rules aimed at different taxpayers, and we cover the employee side in the employee deduction for tips and overtime. On the employer side, the work is unglamorous and continuous: configure the point of sale correctly, collect tip reports every month, pay and record the employer FICA accurately, then claim what those records support. Top Pro Accounting is led by an Enrolled Agent, and we run tip heavy payroll for South Florida restaurants, salons, and spas year round, so the credit is computed from live records instead of reconstructed in April.