Counting Tips Toward Minimum Wage

April 13, 2006

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Special rules apply for tips received by employees. The federal law allows you, within limits, to take a tip credit against the minimum hourly wage rate. In other words, the law allows you to presume that your tipped employees are receiving a certain level of tips each pay period, and you can reduce their cash pay accordingly. The rules are as follows:

The minimum wage for tipped employees is $2.13, which was originally 50 percent of the previous basic minimum wage of $4.25; although the minimum wage was raised to $5.15, the minimum for tipped employees was not increased; thus, you can take a tip credit of up to $3.02 per hour.
The credit cannot exceed the value of tips received; thus, the employee must actually be receiving $3.02 in tips per hour before you can get the credit.
The employee must be notified that you're taking the credit.
All tips received by the employee must be kept by the employee — the employer may not keep any tips received.
Only "tipped employees" qualify for the credit, who are defined as employees who regularly and customarily receive over $30 a month in tips.
Workers who normally get more than $30 per month in tips only during a particular month (such as during the Christmas season) don't qualify as tipped employees.

State laws. Some state laws also address tip credits, and in many cases they mirror the federal law. Where they don't, the rule is that if the federal minimum wage minus the federal tip credit is lower than your state's minimum wage minus your state's tip credit (if any), you must pay your employees the higher amount.

Click on your state on the map below to find out what your state law obligations are for tipped employees. States that are blue have no enacted laws regarding tip credits.