07/21/2026

The FICA Tip Credit Now Covers Beauty Businesses. Here’s How Salon Owners Get Money Back.

For over 30 years, restaurant owners have collected a federal tax credit on the payroll taxes they pay on employee tips. Salons, barbershops, and spas were left out. That changed in 2025. The One Big Beautiful Bill Act (OBBBA) extended the FICA tip credit to beauty businesses, and unlike some other parts of that law, this change is permanent.

If you have tipped employees on payroll, this credit can put real money back in your pocket every year.

Key takeaways

  • The FICA tip credit gives employers back the 7.65% Social Security and Medicare tax they pay on employee tips.
  • Starting with tax year 2025, beauty businesses qualify: barbering and hair care, nail care, esthetics, and body and spa treatments.
  • The credit only applies to tips reported through payroll. Unreported tips earn you nothing.
  • This change is permanent. It doesn’t expire in 2028 like the employee tips deduction does.

What the FICA tip credit is

Every time an employee reports tips, the business pays the employer’s share of Social Security and Medicare tax on those tips. That’s 7.65% on top of what the employee pays. The FICA tip credit (Section 45B of the tax code) gives that money back to you as a dollar-for-dollar credit against your federal income tax.

Congress created the credit in 1993, but only for food and beverage businesses. The OBBBA, signed July 4, 2025, added beauty services to the law for tax years starting after December 31, 2024. The statute now lists four qualifying service types, as long as tipping is customary in your business:

  • Barbering and hair care
  • Nail care
  • Esthetics
  • Body and spa treatments

What the credit is worth

Take one stylist who reports $20,000 in tips this year. You paid 7.65% employer FICA tax on those tips, about $1,530. The credit hands that back to you. Multiply across a team of eight or ten tipped employees and this credit can be worth $10,000 to $15,000 a year, every year.

One carve-out: tips that bring an employee’s pay up to the federal minimum wage of $7.25 an hour don’t count toward the credit. If your employees’ base pay already meets or beats minimum wage, which is the case in most salons and spas, this carve-out barely matters and most or all of their reported tips are creditable.

What you need to do to claim it

The credit only counts tips that run through your payroll. This is the same theme we covered in our post on the no tax on tips deduction: reported tips are the whole ballgame.

Here’s the system that makes both work:

  1. Collect tip reports from every employee, every month. Employees are required to report their cash tips to you by the 10th of the following month. You will already see tips collected through your point of sale system..
  2. Run all tips through payroll. They’ll show up on W-2s automatically, your employees keep their federal tips deduction, and every dollar becomes creditable for you.
  3. File Form 8846 with your business return. That’s the form that calculates the credit. It flows into the general business credit on your return.

One rule to know: no double dipping. You can’t deduct the payroll tax as a business expense and claim the credit on the same dollars. Your tax preparer handles this adjustment on the return.

Why this matters more now

Your employees now have their own reason to report every tip: the no tax on tips deduction can save them thousands on their federal return, but only for tips that show up on their W-2. Their incentive lines up with yours. The same reported tips that get them a deduction get you a credit.

For years, unreported cash tips were money the whole shop left on the table. Now they cost your employees a deduction and cost you a credit. Fix the reporting system once and everyone gets paid.

FAQ

What to do next

If you have tipped employees and you’ve never heard of Form 8846, you’re likely leaving thousands of dollars with the IRS every year. Click here for our services page.

OTHER CONTENT

YOU MIGHT LIKE