Definition: Under the Fair Labor Standards Act, a tip credit allows an employer to pay a tipped employee a direct cash wage below the federal minimum wage and count the employee's tips toward the rest. The employer must make up any shortfall so the employee still earns at least the full minimum wage.
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The Department of Labor's Fact Sheet #15 on tipped employees sets out the key figures:
| Item | Federal rule |
|---|---|
| Federal minimum wage | $7.25 per hour |
| Minimum direct (cash) wage for tipped employees | $2.13 per hour |
| Maximum tip credit | $5.12 per hour ($7.25 minus $2.13) |
| Who is a tipped employee | Someone who customarily and regularly receives more than $30 a month in tips |
The $7.25 figure is confirmed on the DOL's FLSA page, which also says that where an employee is subject to both state and federal minimum wage laws, the employee is entitled to the higher of the two. State rules for tipped workers can differ from federal rules, so confirm your state's cash wage before relying on the federal tip credit.
Suppose a hypothetical server works 40 hours in a workweek and the employer pays the federal minimum cash wage of $2.13 per hour.
| Line | Good tip week | Slow tip week |
|---|---|---|
| Cash wage (40 × $2.13) | $85.20 | $85.20 |
| Tips received | $400.00 | $150.00 |
| Total (cash wage + tips) | $485.20 | $235.20 |
| Minimum wage owed (40 × $7.25) | $290.00 | $290.00 |
| Employer must add | $0.00 | $54.80 |
In the slow week, cash wage plus tips falls $54.80 short of the minimum wage. Fact Sheet #15 says that if tips plus the cash wage do not equal the minimum hourly wage for the workweek, the employer must make up the difference, at the regular payday for the period in which the workweek ends. Track this by workweek, not by pay period average.
Advance notice. Before taking a tip credit, the employer must inform tipped employees of several items, which Fact Sheet #15 lists, including the amount of the cash wage, the additional amount claimed as a tip credit, and that all tips received belong to the employee except in a valid tip pool. The notice may be oral or written. Keep proof that it was given.
Employees keep their tips. The FLSA prohibits employers from keeping any portion of employees' tips for any purpose, whether or not the employer takes a tip credit. Managers and supervisors may not receive tips from a tip pool; Fact Sheet #15 says they may only keep tips they receive directly from customers for service they directly and solely provide.
Tip pools. When an employer takes a tip credit, a mandatory tip pool generally can include only employees who customarily and regularly receive tips, such as servers and bussers. When the employer pays the full minimum wage in cash and takes no tip credit, Fact Sheet #15 says the pool may also include workers like cooks and dishwashers. The FLSA does not cap the percentage an employee can be required to contribute.
Dual jobs. If an employee holds a tipped job and a separate non-tipped job for the same employer, no tip credit can be taken for hours in the non-tipped job. Fact Sheet #15 uses the example of a hotel worker employed as both a maintenance person and a server.
Before deciding to take a tip credit, it helps to work through a short set of questions with your payroll provider or adviser:
Some employers decide the administrative work is not worth it and pay the full minimum wage in cash. That choice also opens the tip pool to back-of-house staff such as cooks and dishwashers, according to Fact Sheet #15. Either way, the decision should be made deliberately and documented.
Tip credit compliance starts with accurate hours by role. With EZTime, servers and bartenders clock in on a tablet kiosk, a GPS mobile time clock with geofencing, NFC tags, or biometric clocks, and managers build schedules with AI shift scheduling and shift templates. Overtime and break alerts warn managers in real time, timecard corrections are kept with an audit trail, and payroll-ready Excel and PDF exports go to whatever payroll software you use. EZTime does not run payroll or calculate tip credits for you. Plans start from $2 per employee per month with a 14-day trial; see the scheduling software and pricing.
This is general information, not legal advice.
Under the FLSA, the minimum direct cash wage for a tipped employee is $2.13 per hour, and the maximum tip credit is $5.12 per hour, which together equal the $7.25 federal minimum wage. State law may require more.
According to DOL Fact Sheet #15, a tipped employee is one who customarily and regularly receives more than $30 a month in tips.
The employer must make up the difference so cash wage plus tips equals at least the minimum wage for the workweek, paid at the regular payday for the period in which that workweek ends.
No. The FLSA prohibits employers, including managers and supervisors, from keeping employees’ tips. A manager may keep only tips received directly from customers for service the manager directly and solely provides.