Every time an employee reports a tip, you pay employer Social Security and Medicare tax on it: 7.65% of money that was never your revenue. Restaurants have long been able to claim most of that back as a federal tax credit. Since the 2025 tax law, salons can too. The FICA tip credit now covers barbering and hair care, nail care, esthetics, and body and spa treatments, for tax years beginning after 2024.
Plenty of salon owners haven't heard. Plenty of restaurant owners have heard of "the tip credit" and assume it's this one. Usually it isn't.
Two different things called a tip credit
The tip credit on payroll is a wage rule. Federal law lets you pay a tipped employee a cash wage as low as $2.13 an hour and count up to $5.12 an hour of their tips toward the $7.25 minimum wage. There's nothing to claim — it simply lowers what you pay in wages — and a number of states don't allow it at all.
The FICA tip credit is an income tax credit. It gives back the employer share of Social Security and Medicare tax you paid on employees' tips, and it's claimed on Form 8846 as part of the general business credit. It's elective, it isn't refundable, and you can take it whether or not you use the payroll tip credit.
The two meet in exactly one place, covered below: tips needed to bring someone's pay up to a minimum wage don't count toward the tax credit.
Who can claim it
- Food and beverage businesses where customers customarily tip the people who serve or deliver the food and drink: restaurants, bars, delivery.
- Beauty businesses, since 2025, where tipping is customary for barbering and hair care, nail care, esthetics, or body and spa treatments. The law adds no licensing condition and no revenue test.
Either way, the credit only covers tips received by your employees on which you paid employer Social Security and Medicare tax. A salon of booth renters gets nothing, because renters aren't employees and you don't pay payroll tax on their income. A salon with W-2 technicians, including technicians paid on commission, qualifies.
The FICA tip credit calculation
The credit is 7.65% of creditable tips: an employee's reported tips, less whatever it would take to bring their wages up to a reference minimum wage. The reference depends on the business:
- Restaurants and bars: $5.15 an hour, the federal minimum wage as it stood on 1 January 2007, frozen there by the law. That is the figure on Form 8846; if you find $7.25 quoted for a restaurant somewhere, go by the form.
- Salons and other beauty businesses: $7.25 an hour, the current federal minimum wage.
For most salon staff the reference never bites. A nail technician whose commission already works out well above $7.25 an hour has no shortfall, so every reported tip counts:
- Tips reported in a month: $1,000
- Credit: $1,000 × 7.65% = $76.50
- Six technicians doing the same for a year: about $5,500
A server on a $2.13 cash wage is different. Over 100 hours in a month, bringing them up to $5.15 uses $302 of their tips, and those don't count:
- Tips reported: $1,000
- Less the shortfall: ($5.15 − $2.13) × 100 hours = $302
- Credit: $698 × 7.65% = $53.40
A salon paying the same $2.13 cash wage would measure the shortfall against $7.25 instead, which uses $512 of the tips and leaves a credit of about $37.
You can't count it twice
The credit refunds a tax you've already deducted, so the law makes you give part of the deduction back: you reduce your deduction for employer Social Security and Medicare taxes by the amount of the credit. A $76.50 credit therefore costs you the tax you'd have saved on $76.50 of deductions. For a business paying 24%, it's worth about $58.
That's still money, and it adds up across a staff and a year. Because the credit isn't refundable, it can only reduce income tax you actually owe, but unused credit can be carried back one year or forward for up to twenty. If the business is an S corporation or a partnership, the credit flows through to the owners' returns.
If you run a salon and nobody claimed it for 2025
The extension covers tax years that began after 2024, so a salon with tipped employees could already have claimed it on its 2025 return. If that didn't happen, it isn't necessarily gone: Form 8846 lets you claim the credit, or elect not to, within three years of your return's due date, which can mean an amended return. It's worth one question to whoever prepares yours.
The credit follows the tips you record
Everything above runs on reported tips. Employees who receive $20 or more in tips in a month are required to report them to you by the 10th of the following month. Card tips are recorded by the register as they happen. Cash tips exist on paper only if someone writes them down, and a tip nobody reported is a tip nobody can claim a credit on.
Two things changed for 2026, and both come from the new federal tax deduction for tipped workers rather than from this credit:
- Occupation codes on the W-2. From 2026, W-2s show each employee's total reported tips (box 12, code TP) and a code for their tipped occupation (box 14b). The Treasury list covers manicurists and pedicurists, hairstylists and cosmetologists, shampooers, estheticians, massage therapists, servers, bartenders, bussers, hosts, cooks and dishwashers. Your payroll provider needs every tipped role mapped to one.
- A tip screen with a real zero. Under the final rule for that deduction, if the payment screen offers no way to leave nothing, the minimum isn't a qualified tip. The Sonorch register always shows No tip and Custom amount beside the percentages.
Service charges and automatic gratuities are a separate matter. They're wages, not tips, and they earn no FICA tip credit at all — service charge vs tip explains why the label matters so much. And if your staff share tips, the tip pooling rules set out who's allowed in the pool.
This is general information, not tax advice. But if you run a salon with employees and nobody has mentioned Form 8846, that conversation is probably worth more than most you'll have with your accountant this year.