Form 8846 is the IRS form employers use to calculate the credit for the Social Security and Medicare taxes they paid on employee tips. You total each tipped employee’s reported tips, subtract any portion that fills the gap between the wages you paid and an applicable minimum wage threshold, multiply the creditable remainder by 7.65%, and carry the result to Form 3800. These instructions walk through eligibility, the threshold rule that trips up most filers, the line-by-line math, and where the number lands on your return.
Who Can File Form 8846
The credit under Internal Revenue Code Section 45B was historically limited to food and beverage establishments where tipping is customary: restaurants, bars, cafeterias, catering operations, and delivery services where customers routinely tip employees who provide, deliver, or serve food or drinks.1Office of the Law Revision Counsel. 26 USC 45B – Credit for Portion of Employer Social Security Taxes Paid With Respect to Employee Cash Tips
Starting with tax years beginning in 2025, the One Big Beautiful Bill Act permanently expanded the credit to four additional service categories: barbering and hair care, nail care, esthetics, and body and spa treatments. Salons, barbershops, and day spas can now file Form 8846 for 2025 and later returns.2Internal Revenue Service. Form 8846 – Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips
The same test applies across every category: tipping must be customary for the services your employees perform. A carry-out restaurant where customers do not tip would not qualify. Note also that the credit is available whether or not the employee reported those tips on their own individual return; what matters is that you paid FICA on them.3Internal Revenue Service. FICA Tip Credit for Employers
The Wage Threshold That Reduces Your Credit
Not every tipped dollar generates a credit. A portion of tips is excluded when the direct wages you pay fall below a statutory hourly threshold, because those tips are treated as filling the gap up to the threshold rate.
For food and beverage employers, the threshold is $5.15 per hour, the federal minimum wage as it existed on January 1, 2007. The statute freezes it at that level regardless of any subsequent minimum wage increases.1Office of the Law Revision Counsel. 26 USC 45B – Credit for Portion of Employer Social Security Taxes Paid With Respect to Employee Cash Tips For the newly eligible beauty and personal care employers, the threshold is $7.25 per hour, the current federal minimum wage.2Internal Revenue Service. Form 8846 – Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips
If your direct wages already meet or exceed the applicable threshold, every reported tip counts and the non-creditable amount is zero. If your direct wages fall below it, some tips are excluded from the credit.
Line-by-Line Calculation
Work through the form employee by employee, then aggregate.
Step 1. Total tips reported. Add up all tips each tipped employee reported to you for the tax year. Include only tips received from customers for qualifying services.
Step 2. Determine non-creditable tips, month by month. For each employee, compare the wages you paid (excluding tips) to the applicable hourly threshold. If wages meet or exceed the threshold, enter zero. If wages fall below it, multiply the threshold by the hours the employee worked that month, subtract the wages you paid, and the difference is the non-creditable portion of tips for that month. Sum the monthly non-creditable amounts across the year.
Example. A food and beverage employee works 170 hours in a month at $2.13 per hour, the federal tipped minimum. The threshold amount is $5.15 × 170 = $875.50. Wages paid are $2.13 × 170 = $361.10. Non-creditable tips for the month are $875.50 − $361.10 = $514.40. If the employee reported $2,500 in tips that month, creditable tips are $1,985.60.
Step 3. Subtract to get creditable tips. Total reported tips minus total non-creditable tips equals creditable tips for that employee. Sum creditable tips across all tipped employees.
Step 4. Apply the 7.65% rate. Multiply total creditable tips by 7.65%, which combines 6.2% Social Security and 1.45% Medicare.4Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates The product is your Form 8846 credit.
Across a full year, a restaurant employee working 2,000 hours at $2.13 per hour who reports $30,000 in tips generates non-creditable tips of ($5.15 × 2,000) − ($2.13 × 2,000) = $6,040, creditable tips of $23,960, and a credit of $1,832.94.
Employees Above the Social Security Wage Base
The 6.2% Social Security portion of FICA only applies to combined wages and tips up to the annual wage base, which is $184,500 in 2026.5Social Security Administration. Contribution and Benefit Base Tips above that cap are subject only to the 1.45% Medicare tax.
If any employee’s combined wages and tips exceed the wage base, check the box on line 4 of Form 8846 and attach a worksheet. Split creditable tips into two pools: those subject to the full 7.65% rate and those subject only to the 1.45% Medicare rate. Multiply each pool by its rate and add the results.2Internal Revenue Service. Form 8846 – Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips This situation is uncommon but can arise at upscale establishments.
Where the Credit Goes on Your Return
Form 8846 runs the calculation, but the credit does not go directly onto your income tax return. It flows to Form 3800, the General Business Credit, which aggregates all nonrefundable business credits for the year.6Internal Revenue Service. About Form 8846, Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips
Partnerships and S corporations report the credit on Schedule K and pass it through to partners or shareholders, who then pick it up on their own Form 3800. Other filers enter the Form 8846 amount on Part III, line 4f of Form 3800.2Internal Revenue Service. Form 8846 – Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips
From Form 3800, the total moves to your primary return. Corporations report it on Form 1120.7Internal Revenue Service. Form 3800 – General Business Credit Sole proprietors and individual partners or S corporation shareholders report it on Form 1040 through Schedule 3, line 6a.8Internal Revenue Service. Schedule 3 (Form 1040) – Additional Credits and Payments
You Cannot Also Deduct the Same Taxes
Section 45B prohibits a double benefit. Any payroll tax amount used to calculate the tip credit cannot also be deducted as a business expense.1Office of the Law Revision Counsel. 26 USC 45B – Credit for Portion of Employer Social Security Taxes Paid With Respect to Employee Cash Tips Your preparer needs to reduce your payroll tax deduction by the credit amount, or you risk an adjustment on audit.
The credit reduces tax dollar for dollar while a deduction only reduces taxable income, so the credit is almost always the better outcome. If a deduction would be more valuable in a particular year, Section 45B allows you to elect out of the credit entirely for that year.1Office of the Law Revision Counsel. 26 USC 45B – Credit for Portion of Employer Social Security Taxes Paid With Respect to Employee Cash Tips
Records You Need Behind the Number
The calculation only holds up if your payroll and tip records do. Three sets of records support Form 8846.
Employee Tip Reports
Employees must report all cash tips to you in writing by the 10th day of the month following the month the tips were received, provided their tips from your establishment reached at least $20 during the month. The report must include the employee’s name, Social Security number, the period covered, and total tips. Many employers use IRS Form 4070 or an equivalent electronic system.9Internal Revenue Service. Tip Recordkeeping and Reporting You can require more frequent reporting, but a single report cannot cover more than one calendar month.
Hours Worked and Wages Paid
You need exact hours worked by each tipped employee each month, not just annual totals, because the non-creditable calculation in Step 2 is monthly. Time clock data and finalized payroll summaries are the primary sources. Your payroll records should clearly separate direct wages from tip income.
FICA Verification
Your quarterly Form 941 filings document the FICA taxes you paid on all compensation, including tips.10Internal Revenue Service. About Form 941, Employer’s Quarterly Federal Tax Return Cross-check your Form 8846 figures against these filings. W-2 Box 7 reports Social Security tips, and for 2026 a new Box 12 code TP reports total cash tips the employee reported to you.11Internal Revenue Service. General Instructions for Forms W-2 and W-3
If the Credit Exceeds Your Tax
The FICA tip credit is nonrefundable, so it can only reduce your tax liability to zero and will not generate a refund. Any unused portion can be carried back one year or carried forward up to 20 years under the general business credit rules.12Office of the Law Revision Counsel. 26 USC 39 – Carryback and Carryforward of Unused Credits In a low-profit year, the credit is not lost; it shifts to a year with enough tax liability to absorb it.