One of the new deductions that came out of the One Big Beautiful Bill (OB3) Act is the deduction for qualified tips, but there is another tip related provision that many taxpayers aren’t aware of, the FICA Tips Credit.
Let’s be honest; many taxpayers don’t report the tips that they receive. (Disclaimer: we at Brass Tax do not endorse this behavior, we are simply realists). Aside from the feeling of well-being that comes from knowing you followed the rules, there isn’t much incentive for tipped workers to report all of their cash tips to their employers. And, since the employers are on the hook for their half of the FICA taxes on those cash tips, there isn’t really much incentive for them to encourage their employees to report them either.
Enter the FICA Tips Credit. This credit is claimed by the employer, who receives a credit against the full amount of FICA that they pay on cash tips. Since these employers aren’t going out of pocket on these taxes, they are more likely to enforce compliance.
For employers who have already been complying with the law, this credit eases the payroll tax burden substantially.
Previously, this credit was available only to employers in the food and beverage industry; however, recent changes opened this up to employers in the personal care services as well, so salon and spa owners may now claim this credit.