Every restaurant owner pays the employer share of Social Security and Medicare tax on the tips their staff report. Most of them do not know that the federal government will give a large share of that money back as a credit against income tax. It has been on the books since 1993.
Industry writers call it one of the most overlooked credits in food service. The math on why it matters is simple.
What the credit is
Under Section 45B of the tax code, an employer can claim a credit equal to the employer’s share of FICA taxes (7.65 percent) paid on employee tips, to the extent those tips exceed what would have been needed to bring the employee to the federal minimum wage. The minimum wage figure used for this calculation is frozen at $5.15 per hour, which means that in nearly every restaurant, almost all reported tips are above the threshold.
The credit is claimed on Form 8846 and flows into the general business credit. It reduces federal income tax dollar for dollar. It is nonrefundable, but unused credit can be carried back one year and forward twenty.
What it looks like in dollars
A restaurant with $300,000 in reported tips for the year is looking at roughly $22,950 in credit. A place with 20 servers averaging $200 a week in tips can exceed $20,000 a year. A multi-location group runs those numbers per location.
One tradeoff to know: you cannot also deduct the portion of FICA tax that you claim as a credit. The credit is still worth more than the deduction, because a credit reduces tax while a deduction only reduces taxable income.
Why the first conversation is about three years
If you have never claimed the credit, you can generally amend returns going back three years from the original due date. For most restaurants we talk to, the initial claim covers multiple years, not one. That is why the first conversation is usually about three years of money rather than a single filing season.
The 2023 tax year is the oldest one still open for most calendar-year filers right now, and it will close in 2027. That is a real deadline, not a manufactured one.
What has changed recently
The credit expanded. For tax years beginning after December 31, 2024, Section 45B now applies to beauty service businesses as well: barbering and hair care, nail care, esthetics, and body and spa treatments. We wrote a separate post for salon and spa owners.
The employee-side “no tax on tips” deduction that took effect for 2025 does not change the employer credit. Employees still report tips. Employers still pay FICA on them. The credit still applies. If anything, the new deduction has encouraged more accurate tip reporting, which increases the credit base.
Getting the records right
The credit is only as good as the tip reporting behind it. What you need:
Reported tips by employee by pay period. Your payroll system already has this.
Hours worked, so the $5.15 threshold calculation can be run.
Form 941 filings showing the employer FICA paid.
If your payroll provider handles tip reporting, they can usually produce the report in an afternoon. If tips have been under-reported historically, the fix is to tighten reporting going forward, not to inflate prior years.
Common reasons restaurants miss it
The CPA does the return but not the payroll. The payroll provider runs payroll but does not do the return. Nobody owns the gap between them. The owner assumes a credit this size would have been mentioned. It usually was not.