Use this as a quick-reference guide for managing tipped employees and staying compliant.

Core tip credit numbers (federal)

• Federal minimum wage: $7.25 per hour.

• Minimum cash wage for tipped employees: $2.13 per hour.

• Maximum tip credit: $5.12 per hour ($7.25-$2.13).

• Guarantee: If cash wage + tips < $7.25 per hour for the workweek, you must make up the difference.

Who qualifies as a tipped employee

• Regularly receives at least $30 per month in tips.

• Works in a job that customarily receives tips (servers, bartenders, bussers, some counter staff).

• Back-of-house roles (cooks, dishwashers, janitors) are not tipped employees and cannot be paid using the tip credit.

Required employee notice

Before taking a tip credit, you must tell each tipped employee:

• The cash wage you will pay (at least $2.13 per hour).

• The amount of tip credit you will claim (up to $5.12 per hour).

• That the credit cannot exceed actual tips received.

• That they keep all tips except for a valid tip pool.

• That you will ensure they earn at least the full minimum wage.

Tip ownership and tip pools

• Tips are the employee’s property.

• You cannot keep any part of employees’ tips for any reason.

• Managers and supervisors cannot keep tips or participate in mandatory tip pools.

• Tip pools can only include employees who customarily and regularly receive tips.

Dual jobs and side work

• You may take a tip credit only for hours spent in a tipped occupation.

• No tip credit for clearly non-tipped work unrelated to the tipped job (e.g., janitorial, maintenance, back-office).

• Track time by role where employees work both tipped and non-tipped jobs.

State and local rules

• Some states do not allow a tip credit at all (e.g., Alaska, California, Minnesota, Montana, Nevada, Oregon, Washington).

• Many states have higher minimum wages or different tipped minimums than federal law.

• Always apply the most generous combination of federal, state, and local law for the employee.

Overtime rules

• Overtime kicks in after 40 hours in a workweek under federal law.

• Overtime rate is based on the full minimum wage (at least $7.25), not the $2.13 cash wage.

• You can still take the tip credit, but must pay the correct overtime premium.

Recordkeeping must-haves

• Track: hours worked (by role if dual jobs), cash wages paid, tips reported, and any tip pool distributions.

• Keep written evidence of tip credit notices and your tip policy.

• Do not make deductions (uniforms, walkouts, breakage) that drop pay below minimum wage.

Tax opportunity: FICA tip credit

• Certain food and beverage businesses can claim a federal income tax credit for the employer share of Social Security and Medicare taxes paid on tips above the minimum wage level.

• Claim it using IRS Form 8846, filed with your annual business tax return.

Tools that make this easier

• Use a POS system that tracks tips per shift and per employee in real time.

• Integrate POS system with payroll to automate tip allocation, tip credit checks, and overtime calculations.

• Review settings anytime minimum wage or tip rules change in your state.

Please reach out to us with any questions. Remember, we’re here to help.