Tip credit

How does a tip credit work?

The tip credit is the gap between the minimum wage and the cash wage the employer pays. Under federal law, the employer pays at least $2.13 an hour and counts up to $5.12 an hour of tips toward the $7.25 minimum. Under 29 CFR 531.59, the credit can be smaller than the maximum but never larger, and it can never exceed the tips you received.

• Maximum credit = minimum wage minus cash wage ($7.25 − $2.13 = $5.12 federally).
• If cash wage plus tips falls short of the minimum for the hours worked, the employer pays the difference.
• The credit applies only to hours spent in the tipped job.

Tip credit example: a banquet shift

A banquet server works a 6-hour wedding in a state that follows the federal numbers. The employer pays $2.13 an hour, so $12.78 in cash. The minimum owed for the shift is $43.50 (6 × $7.25).

• Tips of $60: total pay is $72.78. The employer counts $30.72 of the tips as the credit and owes nothing extra.
• Tips of $20: cash wage plus tips is $32.78. The employer must add $10.72 to reach $43.50.
• In California, the same server earns the full state minimum wage per hour before any tips.

Who counts as a tipped employee?

Under section 3(t) of the Fair Labor Standards Act, a tipped employee works in a job where they customarily and regularly receive more than $30 a month in tips. Banquet servers, event bartenders, cocktail servers and valet attendants usually qualify. If you also work a separate, untipped job for the same employer, those hours must be paid at least the full minimum wage. Setup and cleanup tied to the tipped job can be paid at the cash wage, and federal rules no longer cap that time; the end of the 80/20 rule explains the change. Some states, such as Colorado, keep their own limits.

What must an employer do to take a tip credit?

Before taking a tip credit, the employer must tell tipped workers four things, in writing or out loud. Without that notice, the employer cannot claim the credit and owes the full minimum wage.

• The cash wage it will pay.
• The amount of tips it will count as the credit, which cannot exceed the tips received.
• That workers keep all their tips, except for a tip pool limited to staff who customarily and regularly receive tips.
• That the credit does not apply to any worker who has not been told these rules.

Tip credit vs. service charge

A mandatory service charge on a catering or banquet bill, such as 20% of the food and beverage total, is not a tip under 29 CFR 531.55, even when the employer passes it to staff. It cannot be counted as tips for a tip credit. Money from a service charge that the employer pays out can count toward the minimum wage as regular wages. Our service charge vs tip guide shows how to tell the two apart on an event bill.

Which states do not allow a tip credit?

The U.S. Department of Labor's state table for tipped workers lists eight jurisdictions that require the full state minimum wage before tips: Alaska, California, Guam, Minnesota, Montana, Nevada, Oregon and Washington. In California, that means $16.90 an hour in 2026, plus tips. Most other states allow a tip credit but set their own cash wage, often above $2.13, and some cities set higher local rates. Check your state labor department for the current figures.