Congress has mad a big change to the FICA Tip Credit for 2025! Take a look at this!
With the passage of the new spending bill, the OBBBA expanded the scope of the credit to include certain beauty service businesses. Specifically, the credit will now apply to tips received from customers or clients in connection with the following services, provided tipping is customary:
- Barbering and hair care
- Nail care
- Esthetics
- Body and spa treatments
If you’re unfamiliar with the rules of the FICA Tip Credit, join the club! It’s not a very well-known tax credit. But here are some general guidelines:
- The credit is calculated at 7.65% of the tips received by employees on which you paid social security and Medicare taxes. The credit is limited in some cases, but I won’t go into all those scenarios here.
- The credit is reported on your business’ annual tax return, then passed through to the S-Corporation shareholders or partners in the partnership. The credit is subjected to other restrictions on the individual returns.
- Should the business qualify for the credit, the payroll tax deduction is reduced by the amount of credit claimed. This avoids double benefit or double-dipping.
This change could result in tax savings for your beauty service business. As with all tax law changes, there are LOTS of caveats in place with this one. Remember, the tips must be included in payroll and subjected to payroll taxes for this change to apply.
Please remember that these tax law changes are brand new, and clarification is coming over the next few months. We are providing this guidance based on our understanding of the law as it is written, but the facts could change as we learn more. Please do not make changes to your income or tax position solely based on this blog post, as it is not considered to be tax planning advice. Make sure to consult your tax professional if you have specific questions about your situation.