FICA Tip Credit: One of the CNMI’s and Guam’s Most Overlooked Payroll Tax Credits

by Kim Esmores & Tina Azarvand, Esq., LL.M.

By now, you've probably heard about "no tax on tips,” the headline-grabbing provision in the One Big Beautiful Bill Act (OBBB) signed into law on July 4, 2025, that lets tipped employees deduct up to $25,000 in tip income from their taxable income as an above-the-line deduction. It can be a real benefit for employees, and one worth knowing about. But it's temporary, expiring December 31, 2028, and it only reduces the employee's income tax bill. It does nothing for the employer. That's where the FICA Tip Credit comes in.

Unlike "no tax on tips," the FICA Tip Credit is a payroll tax credit claimed on the employer's return, and unlike "no tax on tips," it's permanent. It has been quietly sitting in the tax code for years, long before the OBBB came along. If that sounds familiar, it should: the Employee Retention Credit (ERC) told the same story, passed in March 2020 under the CARES Act as relief for businesses keeping employees on payroll during the pandemic, yet most business owners didn't discover it until years later, leaving them rushing to file amendments to recover credits they had already been entitled to. The FICA Tip Credit is following the same pattern under the OBBB expansion.

Until the OBBB, the FICA Tip Credit was available exclusively to businesses in the food and beverage industry. The OBBB permanently expanded FICA Tip Credit eligibility to the beauty and personal care industry, meaning massage therapy establishments, barbershops, hair salons, nail salons, spas, and esthetics businesses where tipping is customary can now claim the same credit. For CNMI and Guam business owners in any of these fields, that’s a meaningful shift worth paying attention to.

So what exactly is the credit? Every time you pay an employee, you’re required to pay a matching share of Social Security and Medicare taxes, collectively known as FICA taxes. Employers in tip-driven industries are in a uniquely frustrating position because that employer’s share of 7.65% applies to tips just as much as it applies to hourly wages. You’re legally on the hook for FICA taxes on money you didn’t control, didn’t set, and can’t accurately budget for.

The FICA Tip Credit was created to address exactly that. It allows employers to claim a dollar-for-dollar tax credit on the FICA taxes they pay on employee tips. The credit is available to businesses in industries where tipping is customary. Employees who regularly receive tips for direct customer service are generally the qualifying workers, while back-of-house or support staff who don’t interact with customers generally don’t qualify, though tip-pooling arrangements can be an exception.

There is one important limitation to understand. You cannot claim the credit on tips that go toward bringing an employee up to the federal minimum wage of $7.25 per hour. If your tipped employees earn a lower base wage, their tips first “fill the gap” to bring their earnings up to that threshold. FICA taxes paid on those make-up tips don’t count. Only FICA taxes paid on tips above and beyond the federal minimum wage are eligible.

What About the CNMI and Guam Specifically?

Many CNMI and Guam employers mistakenly assume their territorial status disqualifies them. It doesn't. While both territories operate under a mirror-code income tax system, employment taxes are governed by a different statutory framework entirely. CNMI and Guam employers are required to withhold and remit U.S. Social Security and Medicare taxes for covered wages, the same as employers in any state.

The FICA Tip Credit itself, codified in IRC § 45B, contains no exclusions for U.S. territories. Because CNMI and Guam employers pay U.S. FICA taxes and report tips pursuant to federal law, they qualify for the credit on the same statutory basis as employers located in the states.

One rule to keep in mind: if you claim the FICA Tip Credit on a portion of your FICA taxes, you cannot also deduct those same taxes as a business expense. This prevents double-dipping. But since a credit beats a deduction on a dollar-for-dollar basis, this trade-off almost always works in your favor.

Time Limits for Claiming the Credit

Even where a CNMI or Guam employer qualifies, the credit has to be claimed within the statute of limitations. Under the Internal Revenue Code, that window is generally three years from the date the return was filed, or two years from the date the tax was paid, whichever is later.

For the food and beverage industry, that means potentially looking back several years to recover credits that were earned but never claimed. For the beauty and personal care businesses, the clock starts at January 1, 2025, the OBBB made the expansion retroactive to the beginning of that tax year, but it doesn't reach any further back than that.

The FICA Tip Credit can be carried back one year or carried forward up to 20 years. If your tax liability in a given year isn’t large enough to absorb the full credit, you don’t lose it, you apply it to a different year. This also means that if you were eligible in prior years and never claimed it, you may be able to file amended returns to recover what you missed. That could add up to a substantial amount of money.

The most costly mistake is simply not knowing this credit exists, which, unfortunately, describes many operators in the CNMI and Guam. Beyond that, common pitfalls include miscalculating the minimum wage threshold and failing to maintain the payroll records needed to substantiate the claim.

If your business employs tipped workers and you haven't been claiming the FICA Tip Credit, there's a good chance money is waiting to be recovered, and a professional review of the last three years of returns is the right place to start. At Azarvand Tax Law, our team handles the entire process from eligibility review to amended filings, and we also offer income tax return review sessions for business owners who want a broader look at what else may have been missed. The credit is real, it applies in the CNMI and Guam just like it does in the states, and recovering it is exactly the kind of work we do every day. There's a reason business owners turn to tax attorneys for this kind of work - the combination of legal training and tax expertise means nothing gets left on the table the first time around.

Contact us at info@azarvandtaxlaw.com or call 410-698-4005 to schedule a complimentary 30-minute consultation with one of our tax attorneys today.