Tip Credit

What is tip credit?

Tip credit allows employers to pay tipped employees a lower direct wage, with tips making up the difference to minimum wage. Federal law permits a tip credit of up to $5.12 per hour, meaning employers can pay as little as $2.13 per hour if tips bring total compensation to minimum wage. State laws vary, with some requiring full minimum wage before tips.

Requirements for claiming tip credit

Before taking a tip credit, inform employees of the tip credit provisions, the amount claimed as tip credit, that the credit cannot exceed actual tips received, and that all tips are the employee's property except in valid tip pools. If tips plus direct wages do not reach minimum wage, you must make up the difference. Keep records of tips reported and wages paid.

State variations matter

Many states do not allow tip credit or allow less than the federal amount. Some require full minimum wage regardless of tips. Check your state's rules before implementing tip credit. Errors result in back pay liability plus penalties. For multi-state operations, apply each state's rules to employees working in that state.