If your employees receive tips as part of their regular wages, then you may be able to claim a tip credit. All employers are required to pay their employees at least minimum wage. A tip credit allows employers to lump together their employees’ tips and hourly rates to reach (or go above) the minimum wage.

A tip 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?”

Anyone who makes more than \$30 in tips a month falls under the tip credit rules. These workers are called “tipped employees” 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 less than the minimum wage as long as tips bring their earnings up to the minimum wage threshold. If an employee doesn’t make enough in tips to reach it, then the employer has to pay the difference.

The tip credit can be calculated with this formula:

Minimum wage – cash wage = the tip credit

Let’s use the federal minimum wage and federal cash wage as an example. As of 2018,

• The federal minimum wage is \$7.25 per hour, and
• The minimum cash wage paid to a tipped employee is \$2.13 per hour.

So, if you use the federal minimum wage and cash wage, your tip credit is \$5.12 per hour. Here’s how that’s calculated:

\$7.25 – \$2.13 = \$5.12 per hour

### What about state laws on tip credits?

Great question! Minimum wage requirements vary by state, and may overrule federal regulations. For example, some states:

• Require you to to use their own minimum wage to calculate the tip credit.
• Set a higher minimum tipped employee wage than the federal limit of \$2.13.
• Make you pay tipped employees the full minimum wage, even if they get additional money from tips.