Tipped minimum wage is the lowest amount that employers, like restaurants and resorts, can pay tipped employees. Currently, it’s $2.13 per hour (federal law), but each state has its own regulations—for example, paying a lower minimum wage is illegal in California. It can save money, but participating employers are subject to oversight.
If you need a way to pay your employees their regular wages plus tips, consider Gusto. You can report cash tips and the system will withhold the required taxes, so you avoid issues with the IRS. You can also add credit card tips to an employee’s paycheck, so you don’t have to spend time distributing cash. Sign up for a free 30-day trial today.
How Tipped Minimum Wage Works
Tipped minimum wage is a variation of the federal minimum wage law that requires all employers pay their employees at least $7.25 per hour. If you have tipped employees—workers who earn over $30 monthly in tips—you can apply a maximum tip credit of $5.12 per hour to the federal minimum wage rate to determine their hourly wage. This equates to a minimum tipped wage of $2.13 per hour ($7.25 – $5.12). You’ll have to take this into account for your employees’ pay, and it may change how you do payroll.
The caveat to paying tipped minimum wage is that you’ll be responsible for paying extra if your employee’s total pay received (tips plus hourly wages) doesn’t equate to at least $7.25 per hour (or your state’s minimum rate). Tipped employees are responsible for tracking and reporting tips received from all sources, and you’re required to report the information to the IRS. Any errors, whether intentional or not, can lead to penalties and unexpected taxes for violation of payroll compliance laws.
Remember, the $2.13 tipped minimum wage only relates to federal law; many states have laws in place to ensure employees receive livable wages. If your state is one of them—for instance, California requires a minimum of $12 per hour for some employees (tipped and non-tipped)—you’ll need to comply with its regulations. When faced with conflicting federal, state, and local wage laws, always abide by the ones that give employees the most protection.
Who Receives Tipped Minimum Wage?
Per federal law, tipped employees are workers who regularly receive more than $30 a month in tips. This doesn’t include the cook who is indirectly tipped $50 from a server one month.
Here is a list of commonly tipped employees:
- Waitstaff: Waitstaff includes the servers (waiters and waitresses) who take food and drink orders and deliver them to customers.
- Bartenders: Bartenders typically work behind the bar serving alcoholic beverages.
- Valet parking attendants: Valet parking attendants provide a parking service to incoming customers, usually at a high-end restaurant or hotel.
Although there are other employee types, such as cooks and hosts, who may regularly receive tips as part of a tip sharing program, you aren’t allowed to pay them a tipped minimum wage. Tip sharing happens when regularly tipped employees combine all or a portion of their tips for redistribution among tipped and non-tipped or back-of-house (BOH) employees (e.g., cooks, dishwashers).
How Much Is Tipped Minimum Wage by State?
There’s no standard tipped minimum wage for each state. States like Texas and Georgia don’t have any specific wage laws for tipped employees, which means its employers must comply with the federal rate (no less than $2.13 per hour). As for states like Florida and Colorado, tipped minimum wage is allowed, but it’s higher than the $2.13 federal rate.
You also have states such as Montana and Nevada that don’t allow employers to take a tip credit at all; if you’re in these states, you must pay the full state minimum wage.
If you’d like to know the tipped minimum wage rate for your state, find your state on the map below:
Special Rules for Tipped Minimum Wage by State
Each state that allows tipped minimum wage has its own regulations, and some are more complex than others. Some states have exceptions in place that govern when employers can take a tip credit, and others have different tipped minimum wage amounts based on the industry in which the employer is operating. Whichever state you’re in, the best payroll software can help by taking these payroll taxes and rules into account.
Here are additional tipped minimum wage rules to consider for specific states:
- Connecticut: Tipped minimum wage is $6.38 per hour for employees of hotels and restaurants; employers must pay bartenders at least $8.23 per hour.
- Hawaii: Tip credit is allowed if combined wages and tips are at least $7 more than the applicable minimum wage; current minimum wage is $10.10 per hour, so employees would need to earn at least $17.10 per hour ($10.10 + $7).
- New Jersey: In specific situations where the employer can prove to the Department of Labor and Workforce Development that the tips actually received exceed the creditable amount, a higher tip credit may be taken.
- North Carolina: Tip credit is only allowed if the employer obtains from each employee, either monthly or each pay period, a signed certification of the amount of tips received.
- Oklahoma: For employers with fewer than 10 full-time employees at any one location and who have gross annual sales of $100,000 or less, the basic minimum rate is $2 per hour.
- West Virginia: The state minimum wage law applies only to employers with six or more employees.
- Wisconsin: Businesses may pay $2.13 per hour to employees who are not yet 20 years old and who have been employed with a particular employer for 90 or fewer consecutive calendar days.
Keep in mind that although your state may give you the option to take a tip credit, you shouldn’t feel forced to participate. It creates additional work for both you and your employees and ensures your workers receive less wages than they would have otherwise. You can also opt to take a partial credit against their hourly wages. This allows you to take advantage of the tip credit allowance while ensuring your employees are paid more than minimum wage.
How to Calculate Earnings for Tipped Employees
Calculating earnings for tipped employees is similar to calculating pay for non-tipped employees: hourly wage rate times the number of hours worked ($2.13 x 35 hours = $74.55). The difference is that you’ll have to consider whether their tips received for the week combined with the direct wages you plan to pay are equal to your state’s minimum hourly wage or higher.
Ann worked 38 hours last week and received $50 in tips. Let’s calculate her hourly wage rate.
38 hours worked x $2.13 tipped wage = $80.94 direct wages (that you pay)
$80.94 direct wages + $50 tips = $130.94 total pay received
$130.94 wages + tips / 38 hours worked = $3.44 per hour
$3.44 per hour < federal ($7.25) or any state minimum wage
In the example above, you would be required to pay the employee additional wages. Ann’s $3.44 per hour pay is less than the federal minimum wage of $7.25 per hour. All state minimum wage rates are equal to or higher than $7.25 per hour.
Here’s how you would calculate the additional wages to pay the tipped employee:
38 hours worked x $7.25 federal minimum wage (substitute with your state minimum wage) = $275.50 minimum pay employee should receive
$275.50 minimum pay – $130.94 actual pay received = $144.56 additional wages due
You’d need to pay the employee an additional $144.56 at the end of the workweek to ensure she earns at least the federal minimum wage. This amount could be higher depending on your state laws.
Laws for State Tipped Minimum Wage
Paying your state tipped minimum wage subjects you to additional oversight and reporting. You’re responsible for notifying all new hires of your tip credit policies before they begin working. In addition, federal law requires that you withhold payroll taxes from all tips, whether received in cash, by credit card, or some other means. This leads to additional reporting responsibilities for your employees, who must be honest about the tips they receive directly from customers.
Provide a Tip Credit Notice
Federal law requires you to provide a notice, either oral or written, informing your employees in advance of any tip credits you plan to take. A best practice is to create a written notice you can attach to their new hire paperwork. You should require that each employee sign the notice so you have supporting documentation that they received a copy.
The tip credit notice should include the following:
- The hourly wage you are paying a tipped employee, which must be at least $2.13 per hour per federal law; the amount could be higher depending on the tipped minimum wage by state.
- The amount of the tip credit, which cannot be more than $5.12 (the difference between the minimum required cash wage of $2.13 and the current federal minimum wage of $7.25); the maximum tip credit may be less depending on the tipped minimum wage by state.
- A statement explaining that the tip credit you claim cannot exceed the amount of tips actually received by the tipped employee.
- A statement detailing that all tips received by the tipped employee are to be retained by the employee except for a valid tip pooling arrangement; in addition, inform the employee that managers aren’t allowed to take control of their tips.
- A statement outlining that the tip credit will not apply to any tipped employee unless the employee has been informed of these tip credit provisions.
And just to reiterate: You aren’t legally allowed to take your employees’ tips, unless they request that you collect them for verification purposes. If that happens, you must return the tips in a timely manner.
Tip reporting requirements are another important component of complying with federal wage laws. You’re responsible for collecting payroll taxes on the tips as you would regular wages, so it’s important that your employees track and report to you all tips they directly receive from customers (usually cash tips).
How to Report Tips
You can print copies of Form 4070 to make it easier for your employees to report the monthly tips they receive to you. You can also print copies of Form 4070A so they have a workbook to help track their daily tips. Another check you should perform is making sure the total tip income your employees report each period is at least 8% of their total gross sales for the same period, or you may have to pay additional money for allocated tips.
For payroll taxes, you’ll need to submit Form 941 to report income, Social Security, and Medicare taxes withheld from your employees’ paychecks, and you should use Form 940 to pay federal unemployment taxes (FUTA). At year-end, you’ll be required to prepare Form W-2 for all employees. It reports all income earned by the employee as well as taxes, so be sure to include all wages and tips earned throughout the year in addition to payroll taxes withheld and paid.
Allocated tips are additional monies you may be required to pay if any employee’s total tips received is less than 8% of respective gross sales during the period. This is the IRS’ way of screening for unreported tip income. You must use Form 8027 to report total sales and tips received during the year and enter any allocated tips due or paid in the “allocated tip” box on employees’ Form W-2 at the end of the year. Please note income and FICA taxes are not withheld on these tips, and this requirement only applies to companies with more than 10 employees.
If your business doesn’t have a human resource (HR) expert on staff and you could use some assistance complying with your state’s tipped minimum wage regulations, consider using Bambee. It provides you with an outsourced HR manager who conducts a compliance audit in addition to setting you up with policies and handbooks. You’ll also receive unlimited support for your entire team. Schedule an overview call today.
Payroll Providers for Employers Paying Tipped Employees
Paying a tipped employee can be complex and time consuming, especially if you have more than a handful of employees. Using a payroll service can help with that. The best payroll providers for paying tipped employees have features that will help you pay out tips and withhold taxes from them. Many services also allow your employees to enter their tips, cash, credit card, and so on daily, so you can easily track them.
Here are the top payroll services for paying tipped employees:
Top Payroll Solutions for Paying Tipped Employees
|Payroll Providers||Best For|
|Paychex||Restaurants that need help distributing tips electronically at the end of each shift|
|Gusto||Hotels & restaurants needing help calculating and withholding payroll taxes from tips|
|SurePayroll||Small businesses that need an affordable payroll service that provides minimum wage alerts|
|Inova Payroll||Restaurateurs needing a dedicated payroll specialist in addition to customizable tip features|
|Square Payroll||Restaurants using Square Timecard, which pools and splits tips based on hours worked|
Pros & Cons of Paying Tipped Minimum Wage
Even if your state allows tipped minimum wage, you don’t have to participate. In some cases, it helps employers save money while still allowing employees to receive a decent wage. In other cases, the employees receive the short end of the stick.
Here are reasons you may want to pay tipped minimum wage:
Pros of Paying Tipped Minimum Wage by State
Here are the pros of paying tipped minimum wage:
- Less expense: When employers pay tipped wages versus regular wages, they save money.
- Additional tax credit: Employers who pay tipped wages may be entitled to a FICA tip credit at tax time. This is a credit for taxes paid on tips received that were over the minimum wage requirement.
- Better service: Workers may be more motivated to provide exceptional service since the majority of their income could potentially come directly from tips.
Cons of Paying Tipped Minimum Wage by State
Here are reasons you may not want to pay tipped minimum wage:
- Time consuming: Tracking and reporting tips requires additional time from employees and employers.
- Employees may feel resentful: Some employees may be upset that back-of-house (BOH) employees, like cooks and dishwashers, receive higher pay while they only receive the minimum wage.
- Error prone: Because you have to rely on calculations and employee honesty for accurate tip reporting, errors are more likely to occur. This can lead to unexpected taxes, back pay, and jail time.
Take time to consider the pros and cons of offering tipped wages to your employees. It works for some employers, but not as well for others.
Alternatives to Paying Tipped Minimum Wage
Sometimes the cons of paying a tipped minimum wage aren’t worth the benefits. In those cases, there are alternatives you can try.
Here are alternatives to paying tipped minimum wage.
Charge Service Fees
If saving money is your primary goal, you could consider charging each dine-in customer a mandatory service fee. This is a percentage of the total bill and must be recognized as income to your business. The law doesn’t require you distribute this money to your employees; however, some states do require you provide a statement on the bill that explains whether or not employees will receive the service fees.
If you just want a way to keep your employees motivated, you could consider offering employee bonuses to those who provide great service. You could still track employee tips and reward bonuses according to the total tips each employee receives.
Set a Tip Pooling Policy
If your tipped employees are receiving excessive tips that boost their regular income over other employees’ earnings, like cooks and dishwashers, consider setting up a tip pooling or sharing policy. Tip pooling is combining your employees’ tips and redistributing them among eligible front-of-house employees. Tip sharing is similar but it also includes back-of-house (BOH) employees. This ensures that all employees receive additional compensation (beyond wages) for their hard work. Check state laws before including BOH employees in a tip sharing program.
Frequently Asked Questions (FAQs) About Tipped Minimum Wage
In this article, we discussed tipped minimum wage by state in addition to other concerns you may have about paying tipped employees. However, we realize that some questions are asked more frequently than others, and we’ve addressed them here.
What’s the minimum wage for tipped employees?
The minimum wage for tipped employees varies by state. Federal tipped minimum wage is $2.13 per hour, although employers are allowed to pay tipped employees more while still paying below the regular federal minimum wage of $7.25 per hour. Some states require tipped employees be paid the standard minimum wage; for instance, California requires all employees of businesses with 26 or more workers be paid at least $12 per hour. Other states allow tipped wage but require an amount higher than $2.13 per hour.
Can I pay back-of-house employees tipped minimum wage?
No, employers aren’t allowed to pay cooks a tipped minimum wage. Minimum wage for tipped employees is reserved for employees who receive tips regularly, like waitstaff and bartenders. The back-of-house (BOH) employees don’t customarily receive tips, so paying them a tipped minimum wage wouldn’t make sense.
What is a tip credit?
A tip credit is the amount you’re allowed to deduct from the standard minimum wage rate—currently $7.25 per hour per federal law—to pay tipped employees for their work. Some states, like California, don’t allow it, but others do. It’s important for employers to check their state’s laws, because the rules vary. Per federal law, the maximum tip credit is $5.12 per hour.
Find your state on the chart below to see the minimum wage for tipped employees; for states that don’t allow a tip credit, like California, the standard minimum wage rate is posted:
Tipped Minimum Wage by State
|State||Tipped Minimum Wage|
|California||$11: Businesses with up to 25 employees / $12: Businesses with 26 employees or more|
|Connecticut||$6.38: Hotels/restaurants / $8.23: For bartenders|
|District of Columbia||$3.89|
|Minnesota||$9.86: Large employers ($500k+ revenue) / $8.04: Small employers (less than $500k revenue)|
|Montana||$8.50: $110k+ revenue / $4: Up to $110k revenue|
|Nevada||$8.25: No medical insurance provided / $7.25: If health insurance provided and received|
|New Hampshire||45% of the applicable minimum wage (currently $3.26)|
|New York||$7.50: Food service workers / $1.85: Service employees|
It’s important for employers with tipped employees, especially restaurateurs, to check the tipped minimum wage by state before setting hourly wage amounts. The laws vary—some states don’t require the standard minimum wage—and any violations can result in the employer paying back wages and penalties. Payroll services with compliance assistance can help.
If you’re looking for a payroll service that allows you to report cash and credit card tips, consider Gusto. You can automate payroll, and taxes are held accordingly. The plans are tiered, so you can add compliance assistance when needed. Sign up for a 30-day trial today.