Tip credit
Tip credit is the amount of tips you count toward a tipped employee’s minimum wage, which lets you pay a lower cash wage.
- LAW
- FLSA §3(m)(2), 29 U.S.C. §203(m)
- BOUNDARY
- More than $30 a month in tips
- FORMULA
- $7.25 minus a cash wage of at least $2.13
- WATCH FOR
- No advance notice means no tip credit
Federal law lets you pay a tipped employee a cash wage of at least $2.13 an hour. Tips then cover the rest of the $7.25 minimum wageMinimum wage. Minimum wage is the lowest hourly rate you may legally pay a covered employee, set by federal, state, and sometimes local law.Click to open the term, a tip credit of up to $5.12. A tipped employee customarily and regularly receives more than $30 a month in tips. The credit is not automatic: you must tell the employee about it before you take it. When cash wage plus tips falls short of $7.25 in a workweekWorkweek (FLSA). A workweek under the Fair Labor Standards Act is a fixed, regularly recurring period of 168 consecutive hours used to compute overtime.Click to open the term, you make up the difference.
How do you calculate the tip credit?
The credit equals the minimum wage minus the cash wage you pay. It can never exceed the tips the employee actually received. You may take a smaller credit, never a larger one. Overtime is figured on the full minimum wage, and an overtime hour carries no larger credit than a straight-time hour. The credit applies only to hours worked in the tipped occupation.
| FEDERAL HOUR | WAGE OWED | MOST TIP CREDIT | CASH WAGE YOU PAY |
|---|---|---|---|
| Straight time | $7.25 | $5.12 | $2.13 |
| Overtime, over 40 in the workweek | $10.875 (1.5 × $7.25) | $5.12 | $5.755, so at least $5.76 |
What must you do before taking the credit?
Without the notice you cannot take the credit, so every hour costs the full minimum wage in cash.
- 01
Tell the employee first, orally or in writing: the cash wage, the credit claimed, that the credit cannot exceed tips received, that employees keep all tips apart from a valid tip pool, and that no credit applies without this notice.
- 02
Keep records of each employee paid partly by tips and the tips each one reports weekly or monthly.
- 03
Check every workweek that cash wage plus tips reaches $7.25 an hour, and pay any shortfall.
- 04
Let employees keep their tips. You and your managers take no share, and a card fee may reduce a charged tip only by the fee itself.
How do state rules change the credit?
Seven states require the full state minimum wage before tips, with no tip credit. They are Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington, and Guam does the same. Most other states set their own tipped cash wage and credit, several above the federal $2.13. The rate depends on the state, and sometimes the city, where the work is performed.
Frequently asked
- Fair Labor Standards Act, 29 U.S.C. §203(m) (Definitions)
- 29 CFR 531.59, The tip wage credit
- U.S. Department of Labor, Fact Sheet #15: Tipped Employees Under the Fair Labor Standards Act (FLSA)
- U.S. Department of Labor, Minimum Wages for Tipped Employees
General information, not legal or tax advice. Apply current federal and state rules with qualified guidance.