Confirm Eligibility
- You must be an employer in an industry where tipping is customary. This has historically been the restaurant industry. The beauty industry was added to this list for 2025 and going forward.
- The credit applies to FICA taxes you paid on employee tips that exceed the federal minimum wage requirement (IRS).
Ensure Tips are Reported Properly
- Educate your employees on their legal obligation to report all tips to you as their employer. This includes cash from all sources (ie Venmo, PayPal, CashApp, etc.) and credit card tips.
- Set up a system whereby your employees report tips to you each pay period. (The IRS requires by the 20th of the following month but doing it by payroll is industry standard.)
- Ensure your payroll company is reporting the tips in the appropriate box on the employee W-2 and company W-3.
Your Tax Preparer Completes IRS Form 8846 to Claim Credit
- Your tax preparer will use documents they request from you to calculate the credit.
- Form 8846 is filed with your income tax return (Form 1120 for corporations, Form 1065 for partnerships, or Form 1040 Schedule C for sole proprietors).
- The credit is part of the General Business Credit and flows through to Form 3800, if applicable.
Keep Documentation
- Maintain payroll records, tip reports, and FICA tax payment records.
- The IRS may request supporting documentation during an audit.
Please Note…
- Employees cannot claim this credit — it is strictly for employers.
- Filing incorrectly can trigger IRS audits and penalties, so it’s best to work with a CPA or trusted tax preparer.