IRS Serves Up Savings With the 45(B) Tax Credit

By James Jenco

f you own a food and beverage establishment, you might be overpaying the IRS in payroll taxes. That could be the case if you’re not taking advantage of the 45B tax credit (IRC Section 45(B)). This rather little-known federal tax deduction could save you hundreds or even thousands of dollars a year, depending on the size of your tip-eligible workforce. Here’s how it works.

Why Payroll Taxes Are Higher for Restaurants

As you probably know, it’s your responsibility to pay the employer withholding tax on the FICA and Medicare wages of your employees. However, some of your food and beverage service employees are actually making much more than the minimum (or sub-minimum, depending on your state) wage you pay them, once their tips are taken into consideration.

That means that when you submit withholdings for the actual wages of these tip-eligible employees, it includes payments that you didn’t actually make to them — your customers did. That’s why the 45(B) credit is so valuable to your business as an offset to what you pay in Federal payroll taxes.

What Is 45(B) Tax Credit And How It Works

The IRS 45B tax credit lets employers take a credit to offset the 7.65% you pay for staffers’ FICA and Medicare withholdings on the part of their total income collected in tips.

For example: a New York City restaurant pays the Federal withholding tax on $20 per hour that ten tip-eligible employees made, each working 2,000 hours during the tax year. Hence, the business pays the IRS 7.65 percent of $400,000 ($40,000 in wages for each employee x ten employees), for a total of $30,600 ($400,000 x 7.65 percent).

However, the restaurant only paid the employees $7.50 per hour (the current city minimum wage), meaning that they each made an additional $12.50 in tips to make that $20 hourly total. Therefore, according to 45(B), the restaurant could gain a credit of 7.65% of the total wage collected by each employee over $7.50 per hour. So in our example, the business could be credited for $19,125 (7.65 percent of $12.50 per hour x 2,000 hours per employee x 10 employees).

This credit should be claimed on Form 8846, Credit for Employer Social Security and Medicare Taxes on Certain Employee Tips.

Easy money, right? Not necessarily.

Documentation Requirements

To qualify, tip-eligible employees must report their tip totals using IRS Form 4070, Employee’s Report of Tips to Employer.

This can be challenging for two reasons:

1. Employees may be reluctant to take the time to provide documentation.
2. Cash tips are easy to forget—or underreport.

One way to encourage accurate reporting is to require employees to submit a weekly or biweekly tip report before receiving their paycheck.

If most tips are collected electronically (as is increasingly common), reporting becomes simpler and more reliable.

Why It’s Worth It

Even if there are a few hassles, the tax savings could be well worth the effort, as my example indicates. Simply get an efficient documentation process in place and reap the tax rewards.

Key takeaway: If you run a restaurant, bar, or café with tipped employees, review your payroll process, document tips correctly, and file Form 8846 to claim the 45B tax credit.

FAQ

1. Which businesses qualify for the 45B tax credit?

The credit generally applies to food and beverage establishments where tipping is customary. Restaurants, bars, cafés, and similar businesses can claim it for the FICA taxes they pay on employee tips that are reported to the IRS.

2. How often do employees have to report their tips?

The IRS requires employees to report cash and charge tips of $20 or more by the 10th of the following month, usually using Form 4070 (Employee’s Report of Tips to Employer). Some employers simplify this by requiring weekly or biweekly reporting to align with payroll.

3. Does claiming the credit affect the business’s wage deduction? How does it show up on the tax return?

Yes. Businesses must reduce their wage deduction by the amount of the credit claimed. The 45B credit itself is reported on Form 8846 (Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips) and then carried over to the business’s tax return.

4. What happens if employees under-report tips?

Employers can only claim the credit on tips that employees officially report. If tips are under-reported, the business pays less in FICA tax on those amounts but also loses the opportunity to claim the credit. This is why encouraging accurate and timely reporting is critical.

5. Is electronic tip reporting easier to manage?

Yes. When tips are collected electronically (e.g., credit cards, mobile payments), records are automatically created, making documentation more accurate and easier to track. This reduces the risk of under-reporting compared to relying solely on cash tips.

As a manager at Wiss & Company LLP, James Jenco provides tax, auditing, consulting, and bookkeeping services for a range of clients. He can be reached at (973) 994-9400 or [email protected].

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