What Is Tip Credit? (2026)

Key numbers at a glance

What Tip credit means

Under Section 3(m) of the Fair Labor Standards Act, an employer of a tipped employee may pay a reduced cash wage and count the employee's tips toward the remainder of the minimum wage obligation. Federally, that split is $2.13 in cash plus up to $5.12 in tips, adding up to the $7.25 federal minimum. The employer is not keeping your tips — the tip credit never transfers ownership; tips remain the employee's property under federal law. It merely lets the tips you already receive stand in for wages the employer would otherwise owe (per the DOL tip regulations page).

The credit is conditional, not automatic. The employee must customarily and regularly receive more than $30 a month in tips. The employer must inform the employee in advance that a tip credit is being taken, what the cash wage is, and that all tips received are retained by the employee (aside from a valid tip pool). And the credit only works if tips actually arrive: for every workweek, cash wage plus retained tips must average at least the full minimum, or the employer owes a top-up. The workweek, not the shift and not the pay period, is the unit the whole calculation runs on.

States layer three patterns on top. Roughly twenty states follow the federal numbers exactly — Texas, Indiana, Kansas and their neighbors all run $2.13/$7.25/$5.12. About two dozen set their own higher cash wage with a smaller credit: Illinois, for instance, pairs a $9.00 cash wage with a $15.00 minimum, making its credit $6.00, while Florida's 2026 numbers are $10.98/$14.00/$3.02. And seven states reject the tip credit entirely — Alaska, California, Minnesota, Montana, Nevada, Oregon and Washington — forcing the full minimum in cash before any tip counts. Washington's is $17.13. The full list lives on our tipped minimum wage by state table.

How Tip credit affects your numbers

The credit moves money between two pockets: your guaranteed paycheck and your tip income. Run a 30-hour workweek under the federal numbers. The employer owes 30 × $2.13 = $63.90 in cash wages. The weekly floor is 30 × $7.25 = $217.50. Keep $450 in tips and your total is $513.90 — far above the floor, the credit did its job, and the employer owes nothing extra. Keep only $120 and the total is $183.90, which is $33.60 short; that shortfall must appear on the check as make-up pay. Same rule, opposite outcome, decided entirely by the tips. Our server paycheck calculator runs both scenarios on your real hours.

Two columns deserve attention. Nebraska shows how wide the gap can get: a $2.13 cash wage against a $15.00 minimum means tips must cover $12.87 an hour before the employer owes anything beyond pocket change — one of the largest credits in the country, per the DOL state table. The overtime column shows the other common trap: overtime is computed on the full minimum, so the federal overtime cash rate is 1.5 × $7.25 − $5.12 = $5.76, not 1.5 × $2.13. The overtime calculator covers that math; the concept behind it is the regular rate.

Common tip credit mistakes

Taking the credit while running an invalid pool. A tip pool that includes managers or supervisors — or kitchen staff while a tip credit is being taken — voids the credit for every affected employee. The penalty is back wages at the full minimum for every hour worked under the broken arrangement, which is why the manager-in-the-pool case is the most expensive mistake in the industry.

Taking the credit on non-tipped time. The credit applies only to hours in the tipped occupation. Long stretches of side work and dual-job duties generally cannot carry the credit — federal benchmarks limit creditable directly supporting work to about 20 percent of the workweek, with a 30-minute continuous cap, though enforcement has shifted through litigation and varies by state.

Never telling the employee. The advance notice requirement is real, and some states — New Jersey is explicit — demand written notice of the cash wage and the credit. An employer who skips it may owe the full minimum in cash regardless of how good the tips were.

When does all this matter most? Slow seasons, large-party venues with service charges instead of tips, and any week with overtime. In busy weeks the credit is invisible money in your employer's pocket; in bad weeks it is the difference between $2.13 and $7.25, and the law puts that difference on the check. For the broader picture of how TippedPay's tools check every one of these rules automatically, start on the TippedPay home page.