Minimum wage for tipped employees by state: Guide for employers

Navigating tipped minimum wage laws can be a daunting task for employers trying to decipher the diverse landscape of labor laws across the United States. Tips play a crucial role in supplementing an employee's income, but they also introduce complexities in pay structures, tax obligations, and compliance with varying state minimum wage standards. Whether it's understanding how cash tips factor into overall compensation or managing wage range discrepancies between states, getting it right is essential to avoid legal pitfalls and ensure fair treatment of your workers.

In this guide, we’ll delve into what employers need to know about the minimum wage for tipped employees, clarifying how tips impact both employers and employees. From distinguishing between employee tips and service charges to exploring tip credits and overtime calculations, we cover the elements that affect your business's financial and legal standing—plus, how you can use software to streamline pay and compliance processes, making it easier for you to manage tipped employees effectively.

By mastering the rules surrounding the tipped minimum wage and staying informed about state minimum wage variations, you can create a fair and compliant workplace that supports both your business objectives and your employees’ rights and well-being.

What is a tipped employee?

A tipped employee is defined by the Department of Labor (DOL) as an “employee engaged in an occupation in which they customarily and regularly receive more than $30 a month in tips.” 

This classification is crucial for employers in the hospitality and food service industries, particularly for compliance with federal and state wage laws. Tipped employees can include a variety of roles in restaurants and bars, but also in other hospitality and service-based businesses like cafes, hotels, salons, and more.

Tipped employees are typically found in roles where direct interaction with customers is frequent, and tipping is customary. Some of the most common professions include:

• Bartenders: Serving drinks and providing a pleasant experience for patrons
• Servers and waitstaff: Taking orders, delivering food, and attending to customers’ needs in restaurants
• Other food service workers: Including hosts, bussers, and kitchen staff who support the dining experience
• Aestheticians: Such as hair stylists and nail technicians who receive tips for their services
• Taxi and delivery drivers: Providing transportation and delivery services where gratuities are often given
• Casino employees: Dealers and other staff who interact with customers in gaming environments
• Pet groomers: Workers who interact with both pets and owners
• Makeup artists: Offering specialized services where clients may leave tips for exceptional work

What is a tip?

A tip, also known as a gratuity, is an optional extra payment that customers choose to give to employees as a reward for good service. Tips are most commonly seen in the hospitality industry but can extend to any service-oriented role. The Department of Labor (DOL) recognizes several types of tips:

• Cash tips: Directly given to employees by customers in the form of cash
• Electronic tips: Received through electronic payment methods such as credit cards, debit cards, or gift cards
• Tip pools and tip sharing: Employees may share tips among a group, ensuring fair distribution based on roles and hours worked

Employee tips vs. service charges: What’s the difference?

While tips and service charges both contribute to an employee’s overall pay, they are fundamentally different and must be treated separately under federal regulations.

Tips are voluntary and determined by the customer based on the quality of service provided. Service charges, on the other hand, are predetermined amounts added to the bill by the employer. These charges are controlled by the establishment and are often mandatory, especially in larger groups or special events.

Key differences:

• Tips: Discretionary and at the customer’s discretion. Can be directly given to employees or distributed through tip pools.
• Service charges: Pre-set by the employer and often mandatory. Always treated as income to the employer, regardless of how they are distributed among workers.

IRS guidelines on service charges

According to the IRS, service charges must be treated as regular income for the employer. This means that regardless of whether the employer decides to distribute the entire service charge to employees or retain a portion, the entire amount is considered taxable income. Here are some important considerations:

• Exclusion from tip reporting: Employees should not include service charges in their tip reports.
• Tax obligations: Service charges are subject to Social Security tax, Medicare tax, and federal income tax withholding.
• Tip replacement: If a service charge is labeled as a tip replacement, it must be fully distributed to employees. Under the Fair Labor Standards Act (FLSA), employers are not required to share service charges with employees unless they are directly linked to tips.
• Transparency: Employers must clearly communicate how service charges are handled and ensure that both employees and customers are informed about the distribution process.

Understanding the distinction between tips and service charges is essential for employers in the hospitality and food service industries. They need to properly classify and handle tips in order to comply with federal and state regulations, safeguard against wage disputes, and avoid tax penalties. 

By recognizing what constitutes a tipped employee, the types of tips received, and the differences between employee tips and service charges, employers can create fair and transparent compensation practices that benefit both their workers and their business operations.

States with a lower tipping minimum

While federal law defines a tipped employee as one who regularly receives at least $30 per month in tips, several states have opted to set a lower threshold to better support their local employees in the hospitality and service industries. These states recognize that a lower tipping minimum can provide employees with more reliable income and adapt to the specific economic conditions of their regions. Here are the states that have established a lower tipping minimum of $20 per month:

Hawaii

Hawaii has chosen to maintain a lower tipping minimum, allowing employees in the hospitality sector, such as servers and bartenders, to receive at least $20 per month in tips. This adjustment reflects the state's strong tourism industry, where tips play a significant role in the overall compensation of tipped employees.

Massachusetts

Massachusetts has also set its tipping minimum below the federal requirement, so tipped employees are defined as those that receive just $20 per month in tips. By doing so, Massachusetts supports its employees in restaurants and other service-oriented businesses, providing them with a more stable and predictable income. This lower threshold helps attract and retain talented workers in the state's competitive hospitality industry.

North Carolina

In North Carolina, the tipping minimum is also set at $20 per month. This policy benefits tipped employees in roles such as waitstaff and bartending, allowing them to earn a more substantial portion of their pay through tips.

Texas

Texas adopts a similar approach with a tipping minimum of $20 per month. This policy supports employees in restaurants, bars, and other service establishments, acknowledging the crucial role that tips play in their income. By lowering the tipping minimum, Texas ensures that tipped employees receive adequate compensation, fostering a more equitable and motivating work environment.

States with no tipping minimum

In several states, there are no specific laws that set a separate minimum wage for tipped employees. Instead, these states adhere to the current minimum wage mandated by the Fair Labor Standards Act (FLSA), which requires employers to pay a tipped minimum wage of $2.13 per hour.

The FLSA places the onus on employers to ensure that employees receive the full minimum wage through a combination of their base pay and tips. Below are the states that do not have a distinct tipping minimum:

Alabama

In Alabama, there is no state-specific minimum wage for tipped employees. Employers must comply with the current minimum wage of $2.13 per hour as stipulated by the FLSA. This means that employers are responsible for ensuring that the total compensation, including tips, meets or exceeds the federal minimum wage requirement. Employees in the hospitality and service industries rely on their tips to bridge the gap between their base pay and the standard wage.

Louisiana

Louisiana follows the federal guidelines by not establishing a separate minimum wage for tipped employees. The current minimum wage of $2.13 per hour applies, and employers must ensure that employees receive sufficient tips to achieve the overall minimum wage. This approach requires employers to actively monitor employee earnings to maintain compliance and support fair compensation practices.

Mississippi

In Mississippi, the current minimum wage of $2.13 per hour for tipped employees is enforced in alignment with federal law. There are no additional state-imposed minimum wage requirements for tipped employees, placing the responsibility on employers to guarantee that tips supplement the base pay to meet the full minimum wage. This structure emphasizes the importance of tips in the overall compensation of employees in the state’s hospitality and service sectors.

South Carolina

South Carolina does not have a separate minimum wage for tipped employees. Employers must adhere to the current minimum wage of $2.13 per hour as defined by the FLSA. This means that employers must ensure that the combination of base pay and tips provides employees with earnings that satisfy the federal minimum wage requirements.

Tennessee

In Tennessee, there is no distinct minimum wage for tipped employees beyond the federal standard. The current minimum wage of $2.13 per hour applies, requiring employers to ensure that tips sufficiently supplement employees' base pay to meet the overall minimum wage. Federal compliance ensures that employees in the hospitality industry receive fair compensation through a combination of wages and tips.

How does tipped minimum wage work? Key considerations

Under the FLSA, the minimum hourly wage for tipped employees must be at least  $2.13.

This means that employees may have a lower base wage, as long as their total earnings with tips included are equal to the federal minimum wage of $7.25 per hour.

The employer must make up for the difference in case the employee doesn’t earn the federal minimum wage by combining the base wage with tips.

How to calculate the minimum wage for tipped employees: The server minimum wage example

To illustrate how the tipped minimum wage works in practice, let’s consider the example of a waiter calculating their total earnings for a shift.

Scenario 1: Adequate tips

• Base hourly wage: $2.13 per hour
• Shift duration: 8 hours
• Total tips received: $50
• Tips per hour: $50 ÷ 8 hours = $6.25 per hour
• Total hourly earnings: $2.13 (base wage) + $6.25 (tips) = $8.38 per hour

In this scenario, the waiter’s total hourly earnings of $8.38 exceed the federal minimum wage of $7.25 per hour, which makes their earnings compliant with minimum wage laws. The employer does not need to make up any difference, as the combined pay meets the required threshold.

Scenario 2: Insufficient tips

• Base hourly wage: $2.13 per hour
• Shift duration: 8 hours
• Total tips received: $30
• Tips per hour: $30 ÷ 8 hours = $3.75 per hour
• Total hourly earnings: $2.13 (base wage) + $3.75 (tips) = $5.88 per hour

In this case, the waiter’s total hourly earnings of $5.88 fall short of the federal minimum wage of $7.25 per hour. The employer is required to make up the difference to make sure the employee earns at least the federal minimum wage.

The shortfall here is $7.25 - $5.88 = $1.37 per hour. Therefore, the employer must add $1.37 to the waiter’s hourly pay, bringing their total earnings to the legal minimum.

When managing tipped employees, employers need to keep several key considerations in mind to ensure compliance with federal minimum wage requirements:

• Complying with minimum wage laws: Employers need to regularly monitor the tips their employees receive to make sure that their total earnings meet or exceed the federal minimum wage. This involves accurately tracking tips and adjusting base wages as necessary to comply with minimum wage laws.
• Proper tip reporting and documentation: Accurate tip reporting is crucial. Employees are responsible for reporting their tips, whether received in cash or through other means. Employers should implement reliable systems to track and document these tips to ensure transparency and compliance with tax obligations.
• Addressing wage shortfalls: If employees don’t earn enough in tips to reach the federal minimum wage, employers must supplement their pay to make up the difference. Failing to do so can result in legal consequences, including wage theft claims and penalties.
• Educating employees about tip reporting: Employers should educate employees about their responsibilities to report tips. Clear communication helps prevent misunderstandings and ensures that employees are aware of how their tips contribute to their overall earnings.

What is a tip credit?

A tip credit allows employers to count a portion of an employee's tips toward fulfilling the federal minimum wage requirements under the Fair Labor Standards Act (FLSA). Essentially, it allows employers to pay a lower cash hourly wage to tipped employees, provided that their total earnings from both tips and base pay meet or exceed the federal minimum wage of $7.25 per hour.

The tip credit is defined as the difference between the cash wage an employer pays directly to a tipped employee and the federal minimum wage. Currently, the maximum tip credit allowed by the FLSA is $5.12 per hour. This means that an employer can pay a tipped employee as little as $2.13 per hour in cash wages, as long as the employee earns enough in tips to bring their total hourly earnings to at least $7.25.

To determine if a tipped employee qualifies for a tip credit, their employer must ensure that the tips received and properly recorded by the employee are sufficient to meet the federal minimum wage when combined with the cash wage. For example:

If an employee earns a cash wage of $2.13 per hour and receives $5.12 per hour in tips, their total earnings are $2.13 + $5.12, or $7.25 per hour. In this case, the employee meets the federal minimum wage requirement, and the employer does not need to make up any additional pay.

On the other hand, if an employee earns a cash wage of $2.13 per hour and receives $3.00 per hour in tips, their total earnings are $2.13 + $3.00, or $5.13 per hour. Here, the employee does not meet the federal minimum wage, and the employer must compensate for the difference ($7.25 - $5.13 = $2.12 per hour) to ensure the employee is paid at least the federal minimum wage.

States that prohibit tip credits

Several states have chosen to prohibit the use of tip credits, requiring employers to pay tipped employees the full federal minimum wage regardless of tips. These states include:

• Alaska
• California
• Massachusetts
• Minnesota
• Montana
• Nevada
• Oregon
• Washington

In states where tip credits are prohibited, employers must make sure that their employees receive the full federal minimum wage of $7.25 per hour through their cash wage, irrespective of the tips earned. This means:

• Employers must pay tipped employees at least $7.25 per hour in cash wages, and any additional tips are supplementary.
• Even in states without tip credits, employees are still required to report all tips to their employers for accurate tax reporting. Tips are considered taxable income and must be reported regardless of tip credit policies.
• These states often have higher base minimum wage laws to compensate for the absence of tip credits, ensuring that employees receive fair compensation without relying on tips.

Minimum wage for tipped employees by state

Navigating the minimum wage landscape for tipped employees involves understanding both federal guidelines and the specific regulations set by each state.

Under the Fair Labor Standards Act (FLSA), the federal minimum wage for tipped employees is a tipped minimum wage of $2.13 per hour. This allows employers to count a tip credit—the difference between the cash wage paid and the federal minimum wage—toward meeting the minimum wage requirements.

However, minimum wage laws for tipped employees can vary significantly across states, with some states setting higher minimum wage rates and altering the tip credit policies to better support their employees.

To provide a comprehensive overview, the table below outlines the minimum wage, maximum tip credit, and minimum tipped wage for tipped employees in each state. This information can help employers comply with both federal and state-specific minimum wage laws.

The federal minimum wage sets a baseline for tipped employees at $7.25 per hour, with a tipped minimum wage of $2.13 per hour and a tip credit of up to $5.12 per hour.

States like California, Oregon, Washington, Minnesota, Montana, Alaska, and Nevada prohibit the use of tip credits, requiring employers to pay the full minimum wage regardless of tips. In contrast, other states allow employers to utilize tip credits, enabling them to pay a lower cash wage as long as tips compensate for the difference.

Employers must accurately track tips and make sure that their employees earn at least the federal minimum wage when combining cash wages and tips. Failure to comply can result in significant legal and financial consequences. Tipped employees rely heavily on tips to achieve their total earnings. In states where tip credits are allowed, employers must carefully manage tips to ensure compliance with minimum wage laws.

How to report tips: Information for employers and workers

Accurately reporting tips is a critical aspect of wage and hour compliance for both employers and employees. Since tips constitute taxable income, understanding the proper reporting procedures ensures that employers meet their legal obligations and employees receive fair compensation. Failure to report tips correctly can lead to significant legal and financial repercussions for both parties.

Employee responsibilities

For employees, accurate tip reporting is essential to comply with tax laws and ensure that their total earnings meet tipped minimum wage requirements.

Employees should diligently record each tip they receive and maintain two copies of these records—one for the employer and one for personal use. Accurate tip records should include:

• Full name of the employee
• Social security number
• Address
• Tip recording time period
• Total amount of tips received during that period

To report tips, employees can use the IRS Publication 1244 form or create a customized form that best fits their needs. 

In addition to reporting tips to their employer, employees must include their tips on their individual income tax returns using IRS Form 1040. If employees fail to report tips to their employer, they are required to declare them as additional wages on IRS Form 4137 (Social Security and Medicare Tax on Unreported Tip Income). This ensures that employees remain compliant with tax laws and avoid penalties.

Employees who earn tips below a certain threshold—$30 per month federally, though some states set this lower at $20—are not required to report these tips to their employer. However, employees should still report all tips earned on their tax returns to remain compliant with federal regulations.

Employer responsibilities

Employers play a pivotal role in ensuring that tips are reported accurately and that employees receive the appropriate tipped minimum wage.

Employers must withhold and deduct Federal Insurance Contributions Act (FICA) taxes—Social Security and Medicare—from employee tips before processing their pay. Additionally, tips are subject to Federal Unemployment Tax Act (FUTA) taxes, which employers must report quarterly using IRS Form 941.

Employers must also verify that the combination of the cash wage and tips paid to employees meets or exceeds the federal minimum wage of $7.25 per hour. If tips are insufficient, employers are obligated to make up the difference to comply with wage and hour laws. This ensures that employees earn at least the federal minimum wage through their total compensation.

To facilitate accurate tip reporting, employers should implement reliable systems that allow employees to log their tips efficiently. Clear communication and training on how to report tips can help prevent discrepancies and ensure that both employers and employees adhere to legal requirements.

In states where tip credits are allowed, employers must carefully calculate the tip credit to ensure that the total pay (base wage plus tips) meets the federal minimum wage. Employers should stay informed about minimum wage increases and adjust their pay structures accordingly to maintain compliance and support their employees effectively.

Rippling: Stay compliant with minimum wages for your employees

When you’re hiring, Rippling is the easiest way to control headcount costs.

Rippling gives your entire organization a single source of truth to create and manage compensation bands—while still protecting sensitive data. Each employee is automatically mapped to the right compensation band based on their role, and bands are enforced during onboarding to keep headcount costs on track. Out-of-band adjustments are flagged automatically, so special cases can be approved or blocked as needed.

Rippling also notifies stakeholders of changes, like when an employee’s compa-ratio drops because of a location change, or if an employee’s compensation is too high or too low.

FAQs on minimum wage for tipped employees by state

How to calculate overtime pay for tipped employees?

Calculating overtime pay for tipped employees means making sure their total earnings meet both the federal tipped minimum wage and the requirements set by state minimum wage laws. Under the Fair Labor Standards Act (FLSA), workers in the restaurant industry such as servers, waitstaff, and bartenders must receive overtime pay at one and a half times their regular wage rate for any hours worked over 40 in a pay period. To accurately calculate tipped overtime, employers first need to make sure that the combination of tips and base pay meets the federal minimum wage. If tips are insufficient, the employer is responsible for making up the difference to comply with both wage and hour labor laws.

Can employers require employees to pool tips?

Yes, employers can require employees to participate in tip pooling, but this must comply with federal and state labor laws. Tip pooling involves workers sharing their tips with other employees who contribute to the service process, such as bussers and bartenders. In states like California, tip pooling is allowed only among employees who customarily receive tips, ensuring that waiters, waitresses, and other food service workers fairly distribute tips. Employers must maintain transparency in how tips are pooled and ensure that the tip pooling arrangement does not result in employees earning less than the minimum wage. Proper payroll practices and clear communication help maintain compliance and foster a fair working environment.

How do minimum wage laws for tipped employees affect payroll taxes?

Minimum wage laws for tipped employees significantly impact payroll taxes by determining how tips are reported and taxed. Under the FLSA, employers must withhold and pay Social Security and Medicare taxes on both the cash wages and tips earned by employees. The Department of Labor mandates that tips reported by workers are subject to federal minimum wage requirements, ensuring that employers calculate payroll taxes accurately based on the total earnings. Additionally, in states with a higher minimum wage like California, employers must adhere to stricter wage and hour labor laws, which may include more comprehensive payroll reporting and tax withholding processes to ensure full compliance and proper taxation of all tips received by employees.

What are the consequences if an employer fails to meet minimum wage requirements for tipped employees?

If an employer fails to meet the minimum wage requirements for tipped employees, they may face severe legal and financial consequences. Non-compliance with wage and hour labor laws can result in wage theft claims, where employees seek back pay for the difference between their actual earnings and the federal minimum wage. Additionally, employers may incur tax penalties and fines imposed by the Department of Labor for failing to withhold and remit the appropriate payroll taxes on tips. In states like California, where tip credits are prohibited, the repercussions are even more stringent, requiring employers to pay the full minimum wage regardless of tips. Legal actions and reputational damage can also harm the restaurant or service business, making it crucial for employers to adhere strictly to minimum wage laws and ensure that employees are fairly compensated.

Are employers required to track and report employee tips?

Yes, employers are required to track and report employee tips to comply with federal and state labor laws. Accurate tip reporting is essential for ensuring that employees receive the correct tipped minimum wage and that employers fulfill their payroll tax obligations. Employees must report all tips, whether received in cash or through electronic payments, and employers must include these tips in their payroll records. In states like California, stringent wage and hour labor laws mandate detailed tracking and reporting to prevent wage theft and ensure transparency in tip pooling arrangements. Utilizing reliable payroll software can help employers manage tip reporting efficiently, maintain compliance with minimum wage laws, and support the financial well-being of their employees.

This blog is based on information available to Rippling as of December 3, 2024.

Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.