If your employees receive tips as part of their regular wages, you may be able to claim a tip credit.
All employers must meet their minimum wage obligations. A tip credit lets you count part of employees’ tip income toward the tipped minimum wage.
The credit is the difference between the minimum wage and the cash wage an employee is paid during a pay period, and it can be collected with each payroll you run.
A cash wage is a fancy term for hourly wage that you pay tipped employees, and it can be less than the minimum wage in some states.
Which employees count as “tipped employees?”
Under the Fair Labor Standards Act (FLSA), anyone who makes more than $30 in tips a month falls under the tip credit rules. These workers are called “tipped employees.” They’re most commonly employed in the food and beverage industry, and include waitstaff, movers, bartenders, bellhops, and anyone else who regularly receives tips as part of their job.
How does a tip credit work?
You can pay tipped employees a lower cash wage as long as their tips bring them up to the full minimum wage. If tips fall short in a workweek, you have to make up the difference.
The tip credit can be calculated with this formula:
Minimum wage – cash wage = the tip credit
Using federal rates from the U.S. Department of Labor in 2026:
Federal minimum wage: $7.25 per hour
Federal minimum cash wage for tipped employees: $2.13 per hour.
$7.25 – $2.13 = $5.12 per hour, the maximum tip credit.
What about state laws?
State rules can be stricter than federal ones. Depending on where you operate, your state may:
Require you to use the state minimum wage to calculate the tip credit.
Set a cash wage higher than $2.13.
Ban the tip credit entirely. As of 2026, Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington require the full minimum wage in cash, with tips on top. Some cities, like Flagstaff, AZ, do too.
If you’re in more than one state, or you’re not sure which rules apply, check your state’s tipped wage rules.
How does tip pooling affect tip credits?
Tip pooling is when employees combine their tips and split them among a group. It’s common in the food and beverage industry, where servers might share tips with bussers and bartenders.
You can run a tip pool, but the FLSA sets rules on who can take part:
If you take a tip credit, only employees who customarily and regularly receive tips can share in the pool. That means servers, bartenders, and bussers, but not cooks or dishwashers.
If you pay the full minimum wage and don’t take a tip credit, you can also include employees who don’t usually receive tips, like kitchen staff.
Managers, supervisors, and business owners can’t take tips from the pool, no matter how you set it up. Employers also can’t keep any portion of employees’ tips for themselves.
Tell employees how the pool works before you start. Mandatory service charges and auto-gratuities (like an automatic 20% fee on large parties) aren’t tips, so they’re not part of a tip pool unless you choose to distribute them. They’re also not eligible for the “no tax on tips” deduction.
Some states have stricter pooling rules than the federal ones, so check your state’s requirements or ask your payroll provider.
What does “no tax on tips” mean for employers?
Under the One Big Beautiful Bill Act, eligible employees can deduct up to a set amount of qualified tips from their federal income tax, through 2028. For employers, the main change is reporting. Starting with 2026 wages, you report qualified tips and the employee’s tipped-occupation code on the W-2. Social Security and Medicare taxes still apply to all tips. Only voluntary cash tips and card tips qualify. Mandatory service charges and automatic gratuities don’t. Check how your state treats the deduction, since conformity varies.
Stay up-to-date on tip credit regulation
The federal and state minimum wages as well as the required hourly wage for tipped employees can change. To keep up with those changes, employers should check this DOL page regularly.
Expert tip (no pun intended)
A company can pay more than the required hourly wage to its tipped employees, and there are many benefits to doing so. However, the higher the wage, the lower the tip credit.
Business owners should work with a CPA or payroll provider to ensure they’re capturing paychecks, tips, and credits correctly.
FAQs
Does the tip credit lower overtime pay?
No. Overtime is calculated on the full minimum wage ($7.25 federally), not the $2.13 cash wage. Employers can take the same tip credit in overtime hours as in regular hours, but not more. Under federal rules, that puts the overtime cash wage at about $5.75 an hour, with tips covering the rest.
What is the FICA tip credit?
The FICA tip credit is a federal tax credit for food and beverage businesses that pay employer Social Security and Medicare taxes (FICA) on employees’ tips. Businesses claim it on IRS Form 8846. Tips used to bring pay up to $5.15 an hour don’t count toward the credit, and unused credit can carry forward.
Can managers or business owners keep tips?
No. Under the FLSA, employers, managers, and supervisors can’t keep any portion of employees’ tips, whether or not a tip credit is taken. They also can’t take part in a tip pool. Mandatory service charges are different because they aren’t tips, so the business may keep them.
