What is tip credit?
A tip credit lets an employer count a portion of an employee’s tips toward its minimum-wage obligation, paying tipped workers a lower direct cash wage as long as tips bring them up to at least the full minimum wage.
Under the federal Fair Labor Standards Act, an employer may pay a tipped employee a cash wage as low as $2.13/hour and take a “tip credit” for the difference up to the federal minimum wage of $7.25 — provided the employee’s tips actually make up the gap. If tips fall short, the employer must pay the difference.
The tip credit only applies to employees who customarily and regularly receive tips, and there are strict rules: employees must keep their tips (except for a valid tip pool), and managers and owners can never take a share.
State law varies widely. Some states set a higher tipped cash wage than $2.13, and several states (including California, Washington, and others) do not allow a tip credit at all — tipped employees must be paid the full minimum wage before tips. Always check your state.
Restaurant example
In a state that follows the federal rule, a server is paid $2.13/hour in direct wages. If they average $15/hour in tips, the employer takes a tip credit and the server’s effective pay is well above minimum wage. If a slow shift leaves them below $7.25/hour including tips, the employer must top them up.
Frequently asked questions
What is the federal tip credit?
The federal tip credit lets employers pay a cash wage as low as $2.13/hour and count up to $5.12/hour of tips toward the $7.25 federal minimum wage, as long as tips actually bring the employee to at least $7.25/hour.
Which states do not allow a tip credit?
Several states — including California, Washington, Oregon, Nevada, Montana, Minnesota, and Alaska — require the full state minimum wage before tips, so no tip credit applies. Many other states set a tipped wage higher than the federal $2.13. Check your state’s current rate.
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