Why the Tip Credit Uses $5.15 (and Never Changes)
The FICA tip credit still uses $5.15 as its hourly floor. That number has not moved in nearly two decades, and it is not tied to today's minimum wage. This page explains the statute, the practical effect on Form 8846 Line 2, and the mistakes owners make when they treat $5.15 as a living rate.
Where $5.15 Comes From
IRC §45B sets the floor for the employer FICA tip credit. The statute does not say "the current federal minimum wage." It points to the federal minimum wage that was in effect on January 1, 2007. On that date the federal minimum wage was $5.15 an hour. Congress locked the figure into the code, and later increases in the federal minimum wage never updated it.
The result is a permanent gap. The federal minimum wage today is higher, and many state tipped cash wages are higher still, yet the credit calculation still measures against $5.15. That is why a restaurant that pays the modern tipped cash wage often excludes far fewer tips than an owner who mistakenly uses the current minimum.
Why It Does Not Change When the Minimum Wage Changes
Most wage rules float with inflation or with new legislation. Section 45B does not. It is a dated reference, not a living rate. When Congress raised the federal minimum wage after 2007, it left the tip-credit statute untouched. The IRS has never issued guidance that substitutes a newer floor. Until Congress amends the code, $5.15 remains the only figure that belongs on Line 2.
That permanence is the entire point of the rule. The credit is larger than it would be if the floor rose with the minimum wage. The trade-off is that the math looks outdated until you see the statute itself.
How It Affects Your Line 2 Calculation
Line 2 removes the tips that merely bring an employee's cash pay up to $5.15. The calculation is done employee by employee and, for accuracy, month by month. Here is one month for one server:
| Item | Calculation | Amount |
|---|---|---|
| Hours worked | — | 200 |
| Pay at the $5.15 floor | 200 × $5.15 | $1,030.00 |
| Cash wages paid ($3.50/hr) | 200 × $3.50 | $700.00 |
| Excluded tips (Line 2 piece) | $1,030.00 − $700.00 | $330.00 |
| Tips reported that month | — | $1,900.00 |
| Creditable tips for the month | $1,900.00 − $330.00 | $1,570.00 |
If the same server had been paid $5.15 or more in cash, the excluded amount would be zero and the full $1,900 would stay creditable. The Form 8846 instructions page shows how these monthly pieces roll into the annual Line 2 total.
What Happens If You Pay Above $5.15
Many states already require a cash wage higher than $5.15 for tipped employees. When every tipped worker's cash wage meets or exceeds $5.15, Line 2 is zero. Creditable tips equal reported tips, and the credit is the largest the law allows. The higher cash wage costs more in payroll, but it also unlocks a bigger Form 8846 credit because nothing is excluded.
Owners sometimes assume a higher cash wage reduces the credit. The opposite is true under §45B. The exclusion shrinks or disappears, so more tips enter the 7.65% calculation.
Does State Minimum Wage Change the Rule?
No. State law sets the cash wage you must pay and therefore the cash-wage number you enter on the worksheet. It does not change the federal $5.15 floor itself. A state that bans the tip credit and requires the full state minimum in cash simply produces a larger cash-wage figure; the $5.15 test remains the same. For the cash-wage amounts that apply in each state, see the tip credit rules by state page.
Common Misconceptions
- "The $5.15 updates every year." False. The figure is frozen by statute at the January 1, 2007 federal minimum.
- "The credit is based on the current minimum wage." False. Using today's federal or state minimum on Line 2 understates the credit.
- "I can average the year instead of working month by month." Risky. The IRS computes the exclusion per employee and per month; annual averages can produce the wrong total when hours or rates fluctuate.
- "Paying more than $5.15 hurts the credit." False. Paying at or above $5.15 removes the exclusion and increases the credit.
FAQ
Where is the $5.15 rule written?
It appears in IRC §45B. The statute references the federal minimum wage in effect on January 1, 2007, which was $5.15.
Do I ever use my state's tipped minimum instead of $5.15?
Only for the cash-wage input. The floor that creates the exclusion is always the federal $5.15 figure.
What if my payroll system uses the current minimum wage for the credit?
Correct it. The system is applying the wrong floor. Re-run the Line 2 calculation with $5.15 before you file Form 8846.
Ready to apply the rule to your numbers? Use the Form 8846 calculator or review the FICA tip credit guide for eligibility details.
Last updated: October 2026