Rebecca Acorn, CPA, MST •
You probably have heard of the “no tax on tips” provision of the OBBBA, but were you aware of the expansion of the FICA tip credit available to employers?
A long-standing credit that employers have had access to is the FICA tip credit. This has been available to those in food and beverage establishments since code Section 45B was introduced in 2007.
You probably have heard of the “no tax on tips” provision of the OBBBA, but were you aware of the expansion of the FICA tip credit available to employers?
A long-standing credit that employers have had access to is the FICA tip credit. This has been available to those in food and beverage establishments since code Section 45B was introduced in 2007.
OBBBA extends the credit to over 50 other occupations, such as barbering and hair care; nail care; esthetics; and body and spa treatments where tipping is customary. Proposed Regulations provide Treasury Tipped Occupation codes that are grouped into 8 categories. The categories are:
The new law allows the newly identified industries to qualify for the Tip Credit for payments received during 2025 through 2028.
What technically counts as a tip?
In order to claim the deduction, a worker must both be in an occupation on the list and receive qualified tips. The proposed regulations provide a definition of qualified and not qualified tips, which includes the following factors:
While the minimum wage taken into consideration of the credit applied to food and beverage workers is the minimum wage as of January 1, 2007 (which was $5.15), the minimum wage when calculating the credit on the newly allowed service wages is based on the minimum wage rate that applies under the Fair Labor Standards Act for the month. As of November 2025, the applicable minimum wage rate was $7.25.
Form 8846, Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips, will likely need to be adjusted for the new calculation, or another form added to calculate the new credit. The lower minimum wage used for food and beverage industry workers versus beauty services industry workers would result in a lower credit amount for employers in the beauty services industry, compared to the same amount of tips in a food and beverage industry.
If your business employs workers in one of the newly identified beauty service industries, you may be eligible to claim the FICA tip credit. Consult your tax advisor for further information.
- 100s - Beverage and Food Service
- 200s - Entertainment and Events
- 300s - Hospitality and Guest Services
- 400s - Home Services
- 500s - Personal Services
- 600s - Personal Appearance and Wellness
- 700s - Recreation and Instruction
- 800s - Transportation and Delivery
The new law allows the newly identified industries to qualify for the Tip Credit for payments received during 2025 through 2028.
What technically counts as a tip?
In order to claim the deduction, a worker must both be in an occupation on the list and receive qualified tips. The proposed regulations provide a definition of qualified and not qualified tips, which includes the following factors:
- Qualified tips must be paid in cash or an equivalent medium, such as check, credit card, debit card, gift card, tangible or intangible tokens that are readily exchangeable for a fixed amount in cash, or another form of electronic settlement or mobile payment application (excluding most digital assets) denominated in cash.
- Qualified tips must be received from customers or, in the case of an employee, through a mandatory or voluntary tip-sharing arrangement, such as a tip pool.
- Qualified tips must be paid voluntarily by the customer and not be subject to negotiation.
- Qualified tips do not include some service charges. For instance, in the case of a restaurant that imposes an automatic 18% service charge for large parties and distributes that amount to waiters, bussers and kitchen staff; if the charge is added with no option for the customer to disregard or modify, the amounts distributed to the workers from such charges are not qualified tips.
- Any amount received for illegal activity, prostitution services, or pornographic activity is not a qualified tip.
While the minimum wage taken into consideration of the credit applied to food and beverage workers is the minimum wage as of January 1, 2007 (which was $5.15), the minimum wage when calculating the credit on the newly allowed service wages is based on the minimum wage rate that applies under the Fair Labor Standards Act for the month. As of November 2025, the applicable minimum wage rate was $7.25.
Form 8846, Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips, will likely need to be adjusted for the new calculation, or another form added to calculate the new credit. The lower minimum wage used for food and beverage industry workers versus beauty services industry workers would result in a lower credit amount for employers in the beauty services industry, compared to the same amount of tips in a food and beverage industry.
If your business employs workers in one of the newly identified beauty service industries, you may be eligible to claim the FICA tip credit. Consult your tax advisor for further information.
RSS Feed