Section 45B gives food and beverage employers a dollar-for-dollar income tax credit for the employer Social Security and Medicare tax paid on tips above the federal minimum wage. It is one of the few credits that survives year after year and it is still claimed by a minority of eligible restaurants — mostly because the payroll paperwork looks harder than it is. This tool computes the 45B excess, the credit, and the out-of-pocket cost of the tips as a check.
All rows run through the same tieBase() and credit() functions the calculator uses. Note how the credit scales with the tip-to-hours ratio, not with headcount: a house with $3/hour of reported tips yields almost nothing above the $7.25 threshold, while a fine-dining room at $18/hour credits most of its employer FICA.
| Business | Tips | Hours | Tips / hour | 45B base (excess tips) | Credit | Net FICA cost |
|---|---|---|---|---|---|---|
| Casual dining | $420,000 | 28,000 | 15.00 | $217,000 | $16,600 | $15,530 |
| Fine dining | $610,000 | 26,000 | 23.46 | $421,500 | $32,245 | $14,420 |
| Coffee shop | $78,000 | 16,000 | 4.88 | $0 | $0 | $5,967 |
| Pizzeria, thin tips | $46,000 | 21,000 | 2.19 | $0 | $0 | $3,519 |
| Bar / tavern | $350,000 | 20,000 | 17.50 | $205,000 | $15,682 | $11,092 |
The credit is a non-refundable income tax credit, not a payroll tax rebate: it reduces income tax on the Form 1120 or 1040 Schedule C and carries back one year / forward twenty. The employer still pays the full FICA deposit through EFTPS and claims the credit afterwards. Tips must be reported by employees and included on Form 4137 or their W-2 — unreported cash is never creditable.
The credit is created by Internal Revenue Code Section 45B and claimed on Form 8846, Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips. It equals the employer's FICA on tips received by employees who customarily receive tips, above the amount that would have been paid at the federal minimum wage.
Only employees who customarily receive tips in connection with providing food or beverages qualify: servers, bartenders, bussers, food runners. Tips paid to non-food employees do not count, and the credit is limited to tips actually reported to the employer.
Compute the greater of (a) tips received, or (b) the federal minimum wage multiplied by hours worked — but only for hours in which the employee earned more than the minimum wage in tips. The excess of tips over that amount is the 45B excess.
Multiply the excess tip base by the employer's 7.65% FICA rate (6.2% Social Security + 1.45% Medicare). Social Security tax only applies up to the annual wage base, so very high earners may not generate the full 7.65% on the tip portion — this calculator lets you change the rate for that case.
Enter the result as a general business credit. It is non-refundable, carries back one year and forward 20, and must be reported with the payroll records that prove the tip amounts and the hours worked. Keep tip reports, time records, and minimum-wage calculations for at least three years.
FICA on tips is a real cost for a tipped business: 7.65% of every reported tip dollar, with no offsetting deduction. Section 45B hands most of it back as an income tax credit. At the federal minimum wage of $7.25, an employee working 40 hours a week can absorb about $290 of tips per week inside the non-creditable zone — roughly $15,000 per year per full-time employee. Tips above that are creditable.
For a restaurant with 28,000 tipped hours and $420,000 of reported tips, the tips-per-hour figure is $15.00. The minimum-wage offset eats $7.25 of that, leaving $7.75 per hour creditable — about $217,000 of eligible tips and roughly $16,600 of credit at 7.65%. That is real money against a typical restaurant's 3–5% operating margin.
The most common failure is not a legal one — it is a records one. The IRS requires that the employer have written evidence of the hours worked and the tips reported. Time-and-attendance data that exists only on a manager's spreadsheet, or tip pools that are distributed in cash and never reported, cannot support the credit.
The second trap is mixing the federal and state minimum wage. Section 45B fixes the offset at the federal minimum wage, not the higher state or local rate. A California operator who offsets tips against the $16.50 state rate will understate the credit substantially. The third trap is treating the credit as refundable and double-counting it with the payroll-tax deduction — the credit reduces the income tax deduction you would otherwise take for the same FICA expense, so the net benefit is the credit minus the lost deduction, at your marginal business rate.
⚠️ Disclaimer: This calculator applies the Section 45B formula to aggregate payroll figures and assumes a flat 7.65% employer FICA rate. It does not check individual employees against the Social Security wage base, does not apply the aggregate-employee or non-refundable-limitation rules on your return, and does not model state credits. Verify against payroll records and your CPA before filing Form 8846. Not tax advice.