IRS Form 8846 – IRS Forms, Instructions, Pubs 2026 – In the fast-paced world of food service, beauty salons, and other tip-based industries, employers often shoulder significant payroll tax burdens. Fortunately, the IRS offers a valuable tax relief option through Form 8846, the Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips. This credit, commonly known as the FICA tip credit, allows eligible businesses to offset a portion of the Social Security and Medicare taxes they pay on employee tips. Whether you’re a restaurant owner, bar manager, or salon operator, understanding how to leverage this credit can lead to substantial savings on your federal tax bill.
In this comprehensive guide, we’ll break down everything you need to know about IRS Form 8846, including eligibility requirements, calculation methods, filing steps, and recent updates for 2025 and beyond. By optimizing your approach to this credit, you can reduce your taxable income while ensuring compliance with IRS rules.
What Is IRS Form 8846 and the FICA Tip Credit?
IRS Form 8846 is a specialized tax form used by certain employers to claim a credit against the employer portion of Social Security (6.2%) and Medicare (1.45%) taxes—collectively known as FICA taxes—paid on tips received by employees. This credit is part of the general business credit under the Internal Revenue Code Section 45B and helps businesses recover costs associated with tipped wages.
The credit essentially reimburses employers for FICA taxes paid on tips that exceed a specified minimum wage threshold. For food and beverage establishments, this threshold is $5.15 per hour (the federal minimum wage as of January 1, 2007). It’s designed to support industries where tipping is customary, recognizing that tips form a significant part of employee compensation.
Key benefits include:
- Reducing overall tax liability.
- Encouraging accurate tip reporting.
- Providing financial relief for small businesses in service sectors.
This credit does not apply to the additional 0.9% Medicare tax on high earners, as that burden falls solely on employees.
Who Is Eligible to Claim the Credit on Form 8846?
Not every business qualifies for the FICA tip credit. To file IRS Form 8846, you must meet specific criteria outlined by the IRS.
Primary Eligibility Requirements
- Industry Focus: The credit is available to employers in businesses where tipping is customary for providing, delivering, or serving food or beverages for consumption. As of tax years beginning after 2024, this has been extended to beauty service providers, including barbering, hair care, nail care, esthetics, or body and spa treatments.
- Tip-Related Taxes Paid: During the tax year, you must have paid or incurred employer FICA taxes on tips received by employees.
- Employee Tip Reporting: Employees must have received tips directly from customers for eligible services.
Examples of qualifying businesses:
- Restaurants, bars, and cafes.
- Food delivery services where tipping occurs.
- Salons, spas, and barber shops (for post-2024 tax years).
If your business operates as a partnership or S corporation, you must file Form 8846 to claim the credit and report it on Schedule K. Other entities, like sole proprietorships or C corporations, report the credit directly on Form 3800 without always needing to attach Form 8846.
Note: You can claim or elect not to claim the credit within three years from the due date of your original return, either on the original or an amended return.
How to Calculate the FICA Tip Credit?
Calculating the credit involves determining the portion of tips eligible for the credit and applying the FICA tax rate. The process is straightforward but requires accurate record-keeping.
Step-by-Step Calculation
- Total Tips Subject to FICA: Sum all tips received by employees on which you paid employer FICA taxes (Line 1 on Form 8846).
- Non-Creditable Tips: Subtract tips used to meet the minimum wage threshold (Line 2). For food/beverage workers, this is based on $5.15/hour; for beauty services, it’s $7.25/hour. Calculate this monthly by comparing actual wages (excluding tips) to the threshold and aggregating for all employees.
- Creditable Tips: Subtract non-creditable tips from total tips (Line 3).
- Apply FICA Rate: Multiply creditable tips by 7.65% (0.0765) (Line 4). If any employee’s wages plus tips exceed the Social Security wage base ($176,100 for 2025; $184,500 for 2026), attach a separate computation: Apply 7.65% to tips up to the base and 1.45% (Medicare only) to excess amounts.
- Add Partnership/S Corp Credits: Include any credits from pass-through entities (Line 5).
- Total Credit: Add Lines 4 and 5 (Line 6). This amount reduces your income tax deduction for employer FICA taxes.
Example: If an employee reports $1,000 in tips and their base wages are $4/hour for 40 hours ($160/week), the non-creditable portion might be calculated based on the gap to $5.15/hour, leading to creditable tips of approximately $860 (adjusted monthly).
Maintain detailed records like tip reports, timecards, and payroll summaries to support your calculations.
Step-by-Step Guide to Filling Out IRS Form 8846
Filling out Form 8846 is relatively simple, with only six lines. Here’s a breakdown based on the official form:
| Line | Description | What to Enter |
|---|---|---|
| 1 | Tips received by employees subject to FICA | Total qualifying tips for the year. |
| 2 | Tips not subject to credit (minimum wage offset) | Amount based on $5.15/hour (food/beverage) or $7.25/hour (beauty). |
| 3 | Creditable tips | Line 1 minus Line 2. |
| 4 | Credit calculation | Line 3 × 0.0765; check box and attach computation if wages/tips > $176,100. |
| 5 | Credits from partnerships/S corps | Pass-through credits. |
| 6 | Total credit | Line 4 + Line 5; report on Schedule K or Form 3800. |
Attach the form to your tax return (e.g., Form 1120, 1065, or 1040 Schedule C). For fiscal-year filers, adjust for calendar-year wage bases if needed.
Recent Updates to Form 8846 for 2025 and 2026
As of tax years beginning after 2024, the credit has been expanded to include beauty service establishments where tipping is customary. This change, aimed at supporting more service industries, uses a higher minimum wage threshold of $7.25/hour for non-creditable tips. No other major updates have been reported as of early 2026.
Always check the IRS website for the latest form version, as wage bases (e.g., Social Security limit) update annually.
How to File and Claim the Credit on Your Tax Return?
- Attach to Return: Submit Form 8846 with your business tax return.
- Report on Form 3800: Enter the credit on Part III, Line 4f of Form 3800 for the general business credit.
- Record-Keeping: Retain documentation for at least three years to avoid audit issues.
If you’re a pass-through entity, partners or shareholders claim their share on personal returns.
Tips for Maximizing Your FICA Tip Credit
- Encourage accurate tip reporting to capture all eligible amounts.
- Use payroll software to track tips and automate calculations.
- Consult a tax professional for complex scenarios, like high-earner adjustments.
- Avoid common mistakes, such as forgetting to reduce your FICA tax deduction by the credit amount.
By staying organized, you can turn this credit into a key part of your tax strategy.
The FICA tip credit via IRS Form 8846 is an essential tool for tip-dependent businesses, offering real savings on payroll taxes. With its recent expansion to beauty services, more employers can benefit. Review your records today and consult the official IRS resources to ensure you’re claiming every dollar you’re entitled to. For the most up-to-date information, visit IRS.gov.