There's a federal credit that lets restaurants recover a real share of the payroll taxes they pay on tip income — and a separate, genuinely complicated question of which minimum wage actually applies, depending on which Maryland county your restaurant sits in.
If you run a restaurant anywhere in Frederick County or central Maryland, two things are worth real attention: a federal tax credit many restaurant owners have simply never claimed, and the fact that "Maryland minimum wage" isn't actually one number once you look at it county by county.
As an employer, you're required to pay the employer's share of Social Security and Medicare tax — 7.65% — on every dollar of tip income your employees report to you, even though that money came from customers, not your own payroll. Section 45B of the tax code gives restaurants a way to recover a meaningful portion of that cost: a dollar-for-dollar federal tax credit, not just a deduction, equal to the employer FICA tax paid on tips that exceed a federal baseline wage amount specific to this credit.
This is a credit, not a deduction. A deduction reduces your taxable income; a credit reduces your actual tax bill directly, dollar for dollar. For a restaurant with a meaningful tipped staff, that distinction alone can mean thousands of dollars a year that many owners simply never claim because they assume it doesn't apply to them or never realized it existed.
The credit is calculated separately for each tipped employee, based on their reported tip income for the year and their actual hourly wage. You're not crediting every dollar of tips — only the portion of tips that exceeds what's needed to bring that employee's base wage up to the specific federal baseline used for this calculation, which is a fixed historical figure written into the credit itself rather than tied to today's actual minimum wage.
One detail that trips up a lot of restaurant owners: only genuinely voluntary tips count. A mandatory service charge — an automatic 18% or 20% added to large party checks, for example — is treated as a wage, not a tip, for this purpose, and doesn't qualify for the credit no matter how it's eventually distributed to staff.
| Payment Type | Counts Toward the FICA Tip Credit? |
|---|---|
| Voluntary tip left by a customer | Yes, to the extent it exceeds the wage baseline |
| Mandatory service charge on a large party | No — treated as wages, not a tip |
| Tip pooled and redistributed among staff | Yes, based on each employee's reported share |
The credit is claimed on Form 8846 and flows through to your main business return — a corporate return directly, or through to the owners' personal returns via Schedule K-1 if your restaurant is organized as an S-Corp or partnership. Accurate, complete payroll records showing reported tips by employee are the entire foundation of the calculation, which is exactly why restaurants with disorganized tip reporting tend to either skip this credit or calculate it incorrectly.
This is where Maryland restaurant owners face a real layer of complexity beyond the federal credit itself. Maryland's statewide minimum wage applies to most employees, with a separate, lower cash wage permitted for tipped employees as long as tips bring total hourly pay up to the full state minimum. But three Maryland counties — Montgomery, Howard, and Prince George's — have enacted their own local minimum wage ordinances that sit meaningfully above the state floor, and those local rates control for any restaurant location physically operating within those counties.
The controlling factor is where the work is physically performed, not where your restaurant's headquarters or main office sits. A Frederick-based restaurant group with a second location in Rockville or Gaithersburg needs to pay that Montgomery County location's higher local minimum wage, even though Frederick County itself follows the standard state rate.
Montgomery County's structure adds another layer on top of that: its minimum wage varies by employer size, with large employers, mid-size employers, and small employers each facing a different rate, adjusted annually each July based on local inflation data. Howard County and Prince George's County each set their own separate rates as well, on their own adjustment schedules. A multi-location restaurant operator in this region genuinely cannot apply one single Maryland wage figure across all locations — each address needs to be checked against its own county's current rate.
Since the FICA tip credit calculation is based on a fixed federal baseline wage written into the tax code — not on whatever your state or county's current minimum wage happens to be — the credit calculation itself doesn't change based on which Maryland county a location sits in. But getting your underlying payroll wage and tip reporting right at each location, respecting whichever local minimum wage actually applies there, is the foundation that makes the federal credit calculation accurate in the first place. A restaurant group paying the wrong base wage at one location has both a wage compliance problem and a tax credit calculation problem stemming from the same root issue.
At Mercer Flanagan, we work with restaurants throughout Frederick County and central Maryland to calculate the FICA tip credit accurately each year, confirm the correct minimum wage applies at every location you operate, and keep tip and service charge income classified correctly on your books.
Book a free consultation and we'll walk through your specific situation — no pressure, no obligation.
Book a Free ConsultationIt's a credit, which reduces your actual tax bill dollar for dollar, rather than a deduction, which only reduces taxable income. Credits are generally more valuable than deductions of the same dollar amount.
No. A mandatory service charge added by the restaurant, rather than left voluntarily by the customer, is treated as wages rather than a tip, regardless of how it's eventually distributed to staff, and doesn't qualify for the credit.
Only if you operate a location physically situated in a county with its own higher local minimum wage, such as Montgomery, Howard, or Prince George's County. The applicable rate is based on where the work is performed, not where your business is headquartered.
By Roy Cogliandolo, CPA · Mercer Flanagan · May 4, 2026
This article is for general informational purposes and reflects practices current as of 2026. Minimum wage rates and credit calculations are subject to change and vary by jurisdiction — confirm current figures with your CPA before relying on this information.