OBBBA Expands FICA Tip Credit Beyond Restaurants

The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, brings a long-awaited and permanent expansion to the FICA Tip Credit (IRC Section 45B) — a valuable incentive previously available only to the restaurant industry. For the first time, many other tip-based businesses, such as salons, barbershops, and spas, are now eligible to claim the credit.

A Major Shift in Eligibility

Prior to OBBBA, the FICA Tip Credit allowed food and beverage establishments to claim a credit equal to the employer’s share of Social Security and Medicare taxes (7.65% of qualifying compensation) paid on employee tips that exceeded the federal minimum wage under the Fair Labor Standards Act of 1938 (as in effect on January 1, 2007). While this provided essential tax relief to restaurants, other businesses where tipping is customary were excluded.

Under the new law, employers in a broader range of industries where tipping is customary can now benefit from this credit offering significant new tax savings for operators and franchises operating salons, wellness franchises, and other qualifying businesses. The law applies to tax years beginning in 2025.

Example: How the Credit Adds Up

Consider a hair salon franchisee with 20 locations, each with $50,000 in annual reported tips. Assuming the entire amount exceeds minimum wage thresholds, the credit would equate to 7.65% of those tips. This amounts to about $3,825 per location. Across all 20 locations, the annual FICA tip credit would total $76,500 in federal tax savings. For corporations, these credits are applied to the corporation’s federal tax. For passthrough entities (partnerships, S corporations, and sole proprietorships), these credits are applied against the individual member or owner’s federal tax.

What This Means for Franchisees

Tax credits are often nuanced and difficult for non-tax professionals to understand but this one is fairly straightforward: business owners operating in the newly eligible service industries will be eligible to report this credit on their business and individual tax returns that should effectively reimburse them for the payroll taxes paid on tips claimed by their employees throughout the year. If an operator was looking to estimate the value of this credit, they could pull out their prior year Form W-3 which is the sum of all W-2s filed by the employer and multiply line 7 (social security tips) by 7.65%. If the prior year reported tips are any representation of current year’s reported tips, this is a reasonable way to estimate the credit that they are now eligible for.

Importantly, the expansion is permanent, offering planning certainty well beyond the 2025–2028 window that applies to other OBBBA provisions.

What This Means for Your Business

OBBBA’s expansion of the FICA Tip Credit marks a major policy shift. For franchisees in the beauty service business, now is the time to take action and evaluate if you are eligible for this expanded credit.

For more information, please contact our Restaurants and Hospitality Industry Practice Co-Leader Bob Gilbert or Franchising Industry Practice Leader Michael Iannuzzi.