The FICA tip credit has been part of the tax code for decades, but changes taking effect in 2026 make it far more important for restaurant owners to get tip tracking right from the start.
This year, if tips, service charges, and wages are not clearly separated, employees may lose access to the new tax relief they expect, and employers may struggle to support the FICA tip credit they planned to claim. By the time these issues surface during tax return preparation, the damage would have been done.
That’s why it’s very important to know how the FICA tip credit for restaurants work in 2026, and how to organize your tip tracking and reporting this year.
What The FICA Tip Credit Is And Why It Exists
The FICA tip credit is a federal income tax credit available to employers in industries where tipping is customary, most notably restaurants. It allows you to recover the employer portion of Social Security and Medicare taxes that you pay on certain employee tips.
When tipped employees report their tips, those tips are subject to payroll taxes just like regular wages. The credit exists to offset part of that cost for employers, recognizing that tips are paid by customers but still create a tax burden for the business.
It is important to note that this is a credit, not a deduction. That means it directly reduces your tax liability dollar for dollar, rather than simply lowering taxable income.
Which Restaurants Typically Qualify
Most full-service restaurants, bars, and hospitality concepts with tipped employees are eligible to claim the credit. The key requirement is that tipping is customary and that employees regularly receive and report tips.
The credit generally applies to front-of-house roles such as servers, bartenders, bussers, and other tipped staff. Back-of-house employees who do not customarily receive tips are not included, even if they participate in tip pooling arrangements.
Eligibility is less about your concept and more about how tips are earned, reported, and processed through payroll.
The $25,000 Tip Tax Relief Rule in 2026
Starting in 2026, employees may be eligible to exclude up to $25,000 of qualifying tip income from federal income tax. This rule is designed to provide direct tax relief to workers in tip-driven industries, including restaurants.
It is important to understand what this rule does and does not change.
The relief applies to employee income tax, not payroll reporting. Tips still need to be reported by employees, processed through payroll, and included in wage records. Employers are still responsible for paying the employer share of Social Security and Medicare taxes on reported tips.
What has changed is that tips now have a different tax treatment than service charges or other wages for employees. Due to that difference, restaurants must be far more precise in how tips are tracked and classified. When tips and gratuities are mixed together, employees may lose access to the relief they qualify for, and employers may miscalculate credits they are entitled to claim.
What You Need To Track During The Year
With the $25,000 tip tax relief rule in place, tip tracking is no longer just a payroll formality. It directly affects both employee tax outcomes and employer credits.
Reported Tips By Employee
Employees must continue to report their tips, and those reported amounts are the foundation for everything that follows. Tips should be tracked by employee and by pay period, not just in total.
Only true tips qualify for employee relief and for the FICA tip credit. These are amounts that are voluntary and determined by the customer.
Service Charges And Automatic Gratuities Separately
Mandatory service charges or automatic gratuities must be tracked separately from tips. Under IRS rules, these amounts are treated as wages, not tips.
This distinction matters more than ever as service charges do not qualify for the $25,000 employee tip exclusion and do not qualify for the FICA tip credit. Blending these amounts together creates reporting errors that affect both employees and the business.
Cash Wages Paid To Tipped Employees
You need accurate records of the hourly wages you pay tipped employees. These wages are used to determine how much of an employee’s tip income exceeds the minimum wage benchmark for the FICA tip credit calculation.
Employer Payroll Taxes Paid On Tips
Even though part of an employee’s tip income may be excluded from income tax, you are still required to calculate and pay employer payroll taxes on reported tips.
Your payroll system should clearly show:
- Reported tips
- Employer Social Security and Medicare taxes on those tips
- Separation from regular wages and service charges
This documentation supports both compliance and credit calculations.
The FICA Tip Credit Still Applies
The introduction of employee tip tax relief does not eliminate the FICA tip credit for employers. You may still claim a credit for the employer portion of Social Security and Medicare taxes paid on qualifying tips. The calculation mechanics remain the same.
Amounts classified as service charges are treated as wages. They are subject to payroll taxes, but they do not qualify for the FICA tip credit.
This is why accurate classification at the point of sale and in payroll is essential. Overstating tips or mislabeling service charges can lead to incorrect credit claims.
Clean tip reporting allows employees to properly apply the income tax exclusion they qualify for. At the same time, it allows employers to claim the FICA tip credit with documentation to support it.
How Vast Supports Restaurants With Tip Credit Tracking
The rules around tips are becoming more important. If tip tracking is not set up correctly early in 2026, the issues tend to compound. Employees may lose access to the income tax relief they expect. Payroll records may need to be corrected retroactively. FICA tip credit calculations can become unreliable or unsupported by documentation. By the time the tax return is prepared, it is often too late to fix gaps in reporting without added time, cost, or risk.
The restaurants that benefit most from the FICA tip credit are the ones that establish clear processes from the start, with correct tips and service charges classified.
At Vast, we help restaurant owners put those systems in place early, so tip reporting supports both employee tax relief and employer credits without confusion.
Book a call with us early to assess if your tip tracking works the way it should.