Claiming the FICA tip credit and taxing service charges correctly

Written for owners of restaurants, cafes and coffee shops, bars, takeout and delivery kitchens, food trucks and bakeries with seating in the US, with state detail for California, Texas, New York and Florida.

The short version

1. Collect tip reports by the next month's 10th.Anyone with $20 or more in tips in a month reports them, on Form 4070 or the POS (As of Oct 2026).
2. Claim the 45B credit on your tip FICA.Leave out only tips needed to lift the cash wage to the January 2007 federal minimum, not today's. Do not also deduct the credited FICA.
3. Treat any mandatory charge as revenue.It may carry sales tax: in California even if paid to staff, and in New York in full if the house keeps any part.

Tips and service charges look like the same money to a guest. To the tax system they are different. A tip belongs to the server, but you withhold and pay payroll tax on it, and much of your share can come back through a federal credit. A mandatory service charge is your revenue, and it is often taxable for sales tax.

Tips: reporting and allocation

• Employees report cash and card tips of $20 or more in a month to you by the 10th of the next month, on Form 4070 or through the POS. You withhold income tax and employee FICA on reported tips and pay employer FICA on them. As of Oct 2026.
• Form 8027: file annually for each qualifying food or beverage operation if your employees at all such operations collectively worked more than 80 average aggregate hours on a typical business day last year. Allocation is generally based on 8% of gross receipts. The 2026 return is due March 1, 2027 on paper, or March 31, 2027 if filed electronically. As of Oct 2026.
• For example, with gross receipts of $1,800,000 and reported tips of $120,000, 8% is $144,000, so $24,000 is allocated to directly tipped staff on their W-2s.
• No tax on tips (2025 to 2028) is an income tax deduction for a worker in an occupation on the Treasury list, up to $25,000 of qualified tips a year, reduced above $150,000 of modified AGI ($300,000 joint). You report each worker's qualified tips and occupation on the W-2. FICA withholding and your share still apply, and mandatory service charges do not qualify. As of Oct 2026.

Service charges and sales tax

• California: a mandatory service charge or automatic gratuity is taxable even if paid to staff; a truly optional tip is not (Cal. Code Regs. tit. 18, 1603(h)). As of Oct 2026.
• New York: restaurant food and drink are taxable (Tax Law 1105(d)). A mandatory gratuity is not, if it is separately stated, identified as a gratuity and paid in full to staff; if the house keeps any part, the whole charge is taxable (20 NYCRR 527.8(l)). New York City's combined rate is 8.875%. As of Oct 2026.
• Texas: a mandatory gratuity of up to 20% of the meal price, separately stated and paid to the staff who serve (not chefs, cashiers or dishwashers), is not taxable. Any part the house keeps is taxable, and a mandatory gratuity above 20% is taxable in full (34 TAC 3.293 and 3.337). Mixed drinks also carry Texas's separate mixed beverage taxes. As of Oct 2026.
• Florida: a gratuity separately stated on the receipt is not taxable when the restaurant receives no monetary benefit from it; if the restaurant keeps any benefit, the whole charge is taxable (Fla. Admin. Code r. 12A-1.0115(7)(a)). As of Oct 2026.

For example, $60,000 of such fees a year carries $5,325 of tax at 8.875%, and New York presumes a charge belongs to staff unless the bill says clearly that it does not.

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