Federal tip credit rules let you claim up to $5.12 per hour toward the minimum wage, paying at least $2.13 per hour in direct cash wages. Before claiming it, you must tell tipped employees about the credit in advance. Each workweek, cash wages plus tips must reach $7.25 per hour, as Fact Sheet #15 explains. A more protective state law overrides these federal rules.
TL;DR:
- An employee qualifies only when the occupation regularly generates more than $30 monthly in tips; occasional tips and job titles alone do not qualify.
- Check each workweek’s cash wages and tips against hours, pay any shortfall by payday, and calculate overtime using the full minimum wage, not $2.13.
- Traditional pools may include only regularly tipped staff; cooks and dishwashers require full minimum wage in cash, and managers may never keep pooled tips.
- For directly supporting duties, the credit is lost when work exceeds 20% of tipped work or continues beyond 30 minutes; track tasks by time block.
- Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington prohibit state tip credits; apply the strictest applicable state or local wage and pooling rules.
Table of Contents
- What the federal tip credit rules say
- Who counts as a tipped employee
- How to calculate and document the tip credit in payroll
- Tip pooling rules and manager restrictions
- Dual jobs and the substantial time rule
- State variation in tip credit rules
- Common compliance pitfalls and a quick fix list
- Why operational controls decide tip credit compliance
- How Heyhive helps you keep hours and payroll accurate
- FAQ
- Sources
What the federal tip credit rules say
The tip credit comes from Section 3(m) of the Fair Labor Standards Act, with the working details in 29 CFR Part 531, Subpart D. The credit was added to the law in 1966, and the 1996 amendments fixed the employer cash-wage floor at $2.13, according to a Congressional Research Service overview.
The math is simple: $7.25 minus $2.13 leaves a maximum credit of $5.12. That figure is a ceiling, not a guarantee. The credit is subject to the applicable tip-credit requirements, so a slow week can shrink or erase it.
The regulations also require you to tell each employee four things before you take the credit:
- The cash wage you will pay
- The dollar amount of the tip credit
- That the employee keeps all tips, except in a valid tip pool
- That the credit applies only because you informed them
Skip the notice and you lose the credit for that employee. You then owe the full minimum wage in cash.
Service charges are a separate matter. A mandatory charge added to a bill is not a tip. It does not count as a tip toward the tip credit.
Who counts as a tipped employee
A tipped employee is someone in an occupation where they customarily and regularly receive more than $30 per month in tips, per Fact Sheet #15. Servers, bartenders, and bussers who share in a valid pool usually qualify. Dishwashers and cooks usually do not, because customers do not tip them as part of the job.
"Customarily and regularly" is the key phrase. A worker who gets an occasional tip does not meet the test. A seasonal worker who regularly earns tips during the busy season can qualify while that tipping lasts. Check the pattern, not a single good night.
Three habits keep your classification defensible:
- Record each employee's tips every pay period.
- Review job titles against actual duties, since the title alone decides nothing.
- Reassess whenever a role changes, such as a host who starts running food.
If you cannot show regular tipping above the $30 line, you cannot claim the credit for that employee.
How to calculate and document the tip credit in payroll
Compliance is tested one workweek at a time. Work through this sequence for every tipped employee, every week:
- Confirm the direct cash wage is at least $2.13 per hour.
- Total the tips the employee actually received that workweek.
- Add the cash wages and the tips, then divide by hours worked.
- If the result is below $7.25 per hour, pay the shortfall on the regular payday.
- Keep the notice, tip records, and pay records on file.
Overtime trips up many employers. Overtime is calculated on the full minimum wage, not the $2.13 cash wage. For deeper background, see our guide to FLSA overtime rules for employers.
Tips paid by credit card can be passed on less the card processor's fee, but the net amount must still meet the minimum wage and arrive by payday, per the DOL eLaws advisor. Hours matter as much as tips, so clean time data matters too. Our time rounding rules guide shows where sloppy rounding creates exposure.
Pro Tip: Run the workweek test in your payroll system as a standing report, so shortfalls surface before payday instead of after an audit.
Tip pooling rules and manager restrictions
The DOL's tip regulations set the boundaries. Two kinds of pools exist, and the rules differ.
- Traditional tip pool: Limited to employees who customarily and regularly receive tips, such as servers and bussers. You can take a tip credit, but only for tips employees actually receive.
- Nontraditional tip pool: Includes workers like cooks and dishwashers. You may run one only if you pay every participant the full minimum wage in cash, with no tip credit.
- Managers and supervisors: They may never take money from a tip pool.
- Direct tips to managers: Managers and supervisors may not keep tips from other employees, per WHD Opinion Letter FLSA2026-13.
- Employer retention: You cannot keep any portion of employee tips, no matter how the pool is structured.
Document who is in the pool and how shares are split. Vague pool rules are a common starting point for disputes.
Dual jobs and the substantial time rule
Some employees do tipped work and non-tipped work in the same shift. The DOL's dual jobs guidance separates three kinds of work: tip-producing work, directly supporting work, and work outside the tipped occupation.
Supporting work, like rolling silverware or setting tables, is allowed with the credit only in limited amounts. Law firm Schneider Wallace describes the "80/20" shorthand. Employment law firm Ogletree notes this issue is a frequent source of litigation.
Here is an illustrative example. Say a server works a 40-hour week, with 30 hours serving and 10 hours on prep and cleaning unrelated to tables. Those 10 hours are outside the tipped occupation, so you owe the full $7.25 in cash for that time and may apply the credit only to the 30 serving hours. Apportion hours by task, and schedule non-tipped work in separate blocks so the records stay clear.
State variation in tip credit rules
Federal law is the floor, not the ceiling. The DOL's tipped wage chart shows three models:
- No tip credit: The full state minimum wage is paid in cash.
- Modified credit: A tip credit is allowed, but with a higher cash wage than $2.13.
- Federal default: The state follows the federal $2.13 cash wage.
According to Symmetry's 2026 state guide, Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington prohibit taking a tip credit against the state minimum wage. Where state or local law is more protective, it controls.
- Identify every state and city where you have tipped staff.
- Apply the highest cash wage and strictest pooling rule that covers each location.
- Recheck rates each January and whenever a local ordinance changes.
Pro Tip: Keep one dated compliance sheet per location, with the state cash wage, the tip credit rule, and the source link, and update it on a set schedule.
Common compliance pitfalls and a quick fix list
The violations that draw enforcement attention are predictable:
- Missing or late notice to employees about the credit
- Tip pools that include managers or other ineligible staff
- Managers keeping tips
- Overtime computed on $2.13 instead of the full minimum wage
- Make-up payments for shortfalls that arrive late
Consequences include back wages, tip recovery, and the loss of the credit for affected employees, as Fact Sheet #15 describes. Violations may also lead to penalties.
Use this checklist to fix problems quickly: review your notices, verify each workweek's records, audit every tip pool, retrain managers on what they may keep, and pay any shortfall right away.
Why operational controls decide tip credit compliance
Tip credit errors rarely start in a legal memo. They start in the schedule, the time clock, and the payroll export. When shift assignments are accurate, clock-in data is reliable, and hours flow straight into payroll, the workweek test becomes arithmetic instead of detective work. We think HR, scheduling, and payroll should share one record of hours, so a dual-jobs split or an overtime week never depends on someone's memory. Good compliance is built into daily operations, not bolted on after the fact. Partner resources on overtime-aware rota building make the same point for other industries.
— Heyhive
How Heyhive helps you keep hours and payroll accurate
Tip credit compliance depends on clean hours, and that is where we help. Our Workforce OS gives you the operational records the workweek test relies on:
- AI Scheduling: We build full weeks of shifts that respect availability and overtime limits, and you approve before anything is published.
- GPS Time Clock: Clock-ins are verified, so your hours data holds up.
- Payroll-Ready Hours: Export accurate hours straight to payroll.
We support your legal and payroll advisors; we do not replace them. For restaurant teams, our restaurant scheduling guide shows how this works day to day, and our GPS time clock overview covers attendance. See your week built in seconds at Useheyhive.
FAQ
Which states do not allow a tip credit?
Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington prohibit taking a tip credit against the state minimum wage, per Symmetry's state guide. In these states you pay the full minimum wage in cash. Always confirm current rules with your state labor agency.
What is the 80/20 rule for tip credit?
It is shorthand for the dual jobs limit. Time on directly supporting, non-tipped work that exceeds 20% of the tipped-work portion of the week, or runs longer than 30 continuous minutes, loses the tip credit, according to Ogletree's analysis. Track tasks by block to stay within it.
Who qualifies for the tip credit?
Employees in occupations where they customarily and regularly receive more than $30 per month in tips qualify, per Fact Sheet #15. You must also give advance notice of the credit. Without both, the credit is not available.
What are the downsides of the tip credit?
For employers, the credit adds recordkeeping and risk: lost credit and back wages if notice, tip pools, or workweek math are wrong. For employees, income depends on tips, and the employer must make up any shortfall to the minimum wage. Careful weekly checks keep both sides protected.