What Is a Tip Credit? Rules, Calculations, and State Laws (2026)

For tipped employees, a paycheck comes from two places: the restaurant and the guests they serve. The tip credit connects the two, letting restaurants count part of an employee’s tips toward the minimum wage they owe. 

How much tip credit a restaurant can take — and how much it still owes in cash wages — depends on state law, overtime hours, and how tips are shared. Connected tip management and payroll tools like Toast Payroll & Team Management can help busy restaurants track tips and hours every week, so those numbers are easier to get right. 

This guide breaks down what a tip credit is, how to calculate it, and the 2026 rules in every state. For the bigger picture, check out the restaurant payroll guide.

Note: This guide is for educational purposes only and does not constitute legal advice. Restaurant owners and managers should consult with legal counsel and/or a qualified payroll professional for specific advice and support.

Key takeaways

• A tip credit lets employers count part of a tipped employee’s tips toward the minimum wage. Under federal law, employers can pay a $2.13 per hour cash wage and take a tip credit of up to $5.12 per hour toward the $7.25 full minimum wage.

• The tip credit is checked every week. If an employee’s cash wage plus tips falls short of the full minimum wage in any workweek, the employer pays the difference.

• State rules can change everything. Some states don’t allow a tip credit at all, and many others require a higher minimum wage or cash wage. Employers must follow whichever rule is most protective of employees.

• Overtime is based on the full minimum wage, not the cash wage. At the federal level, that’s a $5.76 cash wage for each overtime hour.

• The federal 80/20 rule is no longer in effect. Tipped employees can do related side work under the tip credit, but hours worked in a separate, non-tipped job must be paid at the full minimum wage.

• The FLSA tip credit and FICA tip credit are different. One lowers the cash wage employers pay; the other is a tax credit for payroll taxes paid on tips.

What is a tip credit?

A tip credit is a rule under the Fair Labor Standards Act (FLSA) — the federal law that sets the minimum wage — that lets employers count part of an employee’s tips toward the minimum wage they owe. Restaurants use the tip credit most, but it also applies to any business with employees who regularly earn tips. 

Under the FLSA, employers who take a tip credit can pay tipped employees a lower hourly wage, called the cash wage (sometimes called the tipped minimum wage). At the federal level, the cash wage is $2.13 per hour, and the employee’s cash wage, plus their tips, must add up to at least the full minimum wage, which is $7.25 per hour. 

The difference between the cash wage and the full minimum — up to $5.12 per hour federally — is the tip credit.

A few important things to remember about the tip credit:

• It’s only for tipped roles, and only for the time spent doing those tipped roles (more on dual jobs later).

• State laws can change the numbers. Many states require a higher full minimum wage, a higher cash wage, or don’t allow a tip credit at all (more on tip credit rules by state later).

• It’s calculated every week, not every month. Employers claiming the tip credit must make sure each employee earns at least the full minimum wage every week, even if they only run payroll every two weeks. This can get complicated to tally and monitor, which is where a POS and payroll system that tracks tips and hours together can help.

Why does the tip credit exist, and how does it help restaurants?

The tip credit exists because tipped employees get paid from two places — their employer and their customers — and it helps restaurants manage labor costs while making sure employees still earn at least the full minimum wage. Tips can make up a big share of that pay: card and digital tips at full-service Toast restaurants averaged 19.1% in Q2 2026.

The tip credit recognizes the unique economics of wages in a tipped role:

• It allows employers to pay less in wages, since employees also earn money from tips. This helps to lower restaurant labor costs.

• It ensures employers still pay a minimum amount, even if an employee makes more in tips than the full minimum wage. So it reduces what employers owe, but doesn’t completely eliminate it.

• It ensures employees still get paid the full minimum wage no matter what. If an employee’s tips come up short for the week, the employer is responsible for paying the difference.

Who counts as a tipped employee under the FLSA?

According to the FLSA, a tipped employee is “...an employee engaged in an occupation in which they customarily and regularly receive more than $30 a month in tips.” In other words, tips need to be a regular, expected part of the job — like for servers, bartenders, valet staff, and delivery drivers — not just an occasional extra.

Which restaurant roles can (and can’t) be paid with a tip credit?

Restaurants can take a tip credit for any role where employees regularly earn more than $30 a month in tips. Common tipped roles include:

• Servers

• Bartenders

• Bussers

• Hosts

Common non-tipped roles, like cooks, dishwashers, and managers, can’t be paid with a tip credit. Employees in these roles have to be paid the full minimum wage directly by their employer.

What are the tip credit requirements for employers?

To take a tip credit, employers need to do four things: pay tipped employees at least the cash wage, make sure each employee’s cash wage plus tips adds up to at least the full minimum wage, let employees keep all of their tips, and tell employees about the tip credit before taking it. If an employer doesn’t give employees this notice, they can’t claim the tip credit at all.

According to the FLSA, employers have to give the following information to employees before taking the tip credit:

• The amount of the cash wage the employer is paying the tipped employee

• The additional amount claimed by the employer as a tip credit

• Notice that the tip credit claimed can’t exceed the amount of tips actually received by the tipped employee

• Notice that all tips received by the tipped employee must be kept by the tipped employee — except for “a valid tip pooling arrangement limited to employees who customarily and regularly receive tips”

• Notice that the tip credit will not apply to any tipped employees unless that employee has been given the information above

Notice can be written or verbal, but written notice gives employers a paper trail in case of a dispute. Some states have their own notice requirements, too, so employers should check their state’s rules.

How does the tip credit work?

The tip credit works by letting employers pay tipped employees a lower cash wage, then count part of the employee’s tips toward the rest of the full minimum wage. A few rules impact how much credit an employer can take, like overtime, credit card fees, service charges, and the kind of work an employee does during their shift.

2026 federal tip credit rates: minimum wage, cash wage, and maximum tip credit

In 2026, the federal tip credit rates are:

• Cash wage: $2.13 per hour. Employers claiming the tip credit have to pay employees at least this much, regardless of how much an employee makes in tips.

• Full minimum wage: $7.25 per hour. This is what an employee’s cash wage plus tips need to add up to in order for an employer to claim the tip credit.

• Maximum tip credit: $5.12 per hour. This is the full minimum wage minus the cash wage, or $7.25 – $2.13 = $5.12.

These are the federal numbers, but many states require a higher full minimum wage, a higher cash wage, or don’t allow a tip credit at all. According to the FLSA, “When state law differs from the federal FLSA, an employer must comply with the standard most protective to employees.” (More on tip credit rules by state later.)

What happens if tips don’t cover the full minimum wage?

If an employee’s tips don’t cover the full minimum wage for the week, the employer has to make up the difference with additional cash wages. The employer will need to provide enough cash wages so the employee’s total hourly pay meets the full minimum wage, whether that’s the federal $7.25 per hour, or a higher amount if their state requires it. (See Example 2 below for how this works.)

Want help calculating the gaps? Toast Payroll & Team Management pulls hours and tips straight from Toast POS and calculates tip makeup to the minimum wage, so shortfalls are easier to spot before payday. 

How the tip credit applies to overtime

The tip credit stays the same when tipped employees work overtime, but their overtime pay is based on the full minimum wage — not the cash wage. At the federal level, the maximum tip credit is still $5.12 per hour for overtime hours.

For example: If the full minimum wage is $7.25 per hour, then the overtime rate is 1.5 times that, or $10.88 per hour (rounded from $10.875). Since the maximum federal tip credit stays at $5.12 per hour, the cash wage for overtime hours will be:

$10.88 (overtime rate) – $5.12 (maximum federal tip credit) = $5.76 in cash wages

Note: Overtime figures in this guide are rounded to the nearest cent.

Overtime is based on an employee’s regular rate of pay, which is always at least the full minimum wage. If an employee earns other pay that counts toward their regular rate (like service charges or automatic gratuities distributed to them), their regular rate and their overtime rate go up. Tips themselves don’t count toward the regular rate.

How the tip credit applies to credit card tips and processing fees

When tips are paid by credit card, federal law allows employers to deduct the credit card processing fee on the tip before paying it to the employee. For example: If a card company charges a 2% processing fee on a transaction, the employer can pay the employee 98% of the tip amount (the full tip minus the 2% fee).

There are a few stipulations:

• The employer can’t deduct more than the actual processing fee. If the card company charges 2%, the employer can’t reduce the employee’s tip by 4%.

• An employee must always make at least the full minimum wage, even with the tip credit and processing fees applied.

• Some states don’t allow this at all. Certain states prohibit employers from deducting processing fees from employee tips, so employers should check their state’s rules before making any deductions.

Do service charges count toward the tip credit?

No. Service charges — including automatic gratuity like 18% added to the bill for large parties — aren’t considered tips, so they can’t be counted toward the tip credit. Any tips a customer leaves on top of a service charge are still tips, though, and can be counted toward the tip credit.

That doesn’t mean service charges don’t count toward pay. When an employer distributes service charges to employees, they’re considered wages, so they count toward the employer’s minimum wage obligation directly (instead of through the tip credit). They also need to be included in an employee’s regular rate of pay when calculating overtime.

What side work can tipped employees do under the tip credit?

Tipped employees can do side work related to their tipped job — like setting tables or making coffee — and employers can still take the tip credit for that time. Under the FLSA, what matters is the employee’s job, not whether each individual task earns a tip.

The Department of Labor’s dual jobs regulation gives a few examples of these related duties for a server:

• Cleaning and setting tables

• Toasting bread

• Making coffee

• Occasionally washing dishes or glasses

The regulation doesn’t set a specific time limit on related side work. But it does draw a line between occasional related tasks, like a server washing a few glasses during a shift, and regularly doing work that belongs to a different job — which is where the dual jobs rule comes in.

How the tip credit works for employees with dual jobs

When an employee works two different jobs — one tipped, one not — employers can only take the tip credit for the hours spent in the tipped job. For the hours spent in the non-tipped job, the employer must pay the full minimum wage in cash wages.

For example: If Jamie works two dishwasher shifts (10 hours) and three server shifts (20 hours) this week, their employer must pay Jamie the full minimum wage ($7.25 per hour) in cash wages for those 10 hours of dishwasher work. The employer can claim the tip credit for the 20 hours Jamie worked as a server.

Does the 80/20 rule still apply to the tip credit?

No, the federal 80/20 rule no longer applies to the tip credit. The rule said that employers lost the tip credit for side work that either took up more than 20% of an employee’s hours, or that ran longer than 30 minutes at a time. The U.S. Court of Appeals for the Fifth Circuit struck it down in August 2024, and the Department of Labor formally removed it in December 2024.

Some states and courts still apply their own version of the 80/20 rule, though. Employers should check their state’s rules for the most accurate requirements.

How to calculate tip credit (with examples)

To calculate a tip credit, employers subtract the cash wage from the full minimum wage to find the tip credit rate. Then, every week, they need to check that each tipped employee’s cash wage plus tips adds up to at least the full minimum wage.

A lot of POS systems can help with this, especially when payroll is connected. Toast Payroll & Team Management is designed to sync hours and tips directly from Toast POS into payroll, so the numbers behind each tip credit come from the same place where the team rings in orders.

For more help calculating and managing payroll, check out this guide to calculating restaurant payroll.

Step 1: Confirm the employer can take a tip credit

An employer can take a tip credit when an employee’s cash wage plus tips, divided by hours worked, equals at least the full minimum wage for the week:

(Cash wage × hours worked + tips) ÷ hours worked = hourly rate

If the hourly rate is at least the full minimum wage, the employer can take the tip credit. If it’s lower, the employer has to make up the difference. (The employer also needs to be in a state that allows a tip credit, and has to have given employees notice first.)

Step 2: Find the tip credit rate

The tip credit rate is the full minimum wage minus the cash wage the employer pays, up to the federal or state maximum:

Full minimum wage – cash wage = tip credit rate

At the federal level, that’s $7.25 – $2.13 = $5.12 per hour. If an employer pays a higher cash wage, the tip credit is smaller. For example, an employer paying a $3.00 cash wage can take a tip credit of $4.25 per hour.

Step 3: Calculate tip credit for overtime hours

For overtime hours, the tip credit stays the same, so the employer pays a higher cash wage to cover the difference:

(Full minimum wage × 1.5) – tip credit = overtime cash wage

At the federal level, that’s $10.88 (rounded from $10.875) – $5.12 = $5.76 per overtime hour. For more on overtime pay for tipped and non-tipped employees, check out the guide on how to calculate overtime.

Tip credit calculation examples

Here’s how the tip credit works in three common scenarios at Elm Street Diner, a restaurant in a state that follows the federal minimum wage and allows a tip credit.

Example 1: Tips meet the minimum wage

Priya is a server who worked 32 hours this week.

Here’s how to calculate Priya’s tip credit:

• Full minimum wage for the week: 32 × $7.25 = $232.00

• Cash wages from Elm Street Diner: 32 × $2.13 = $68.16

• Hourly rate with tips: ($68.16 + $480) ÷ 32 = $17.13 an hour, well above $7.25

• Tip credit: 32 × $5.12 = $163.84

Result: Elm Street Diner can take the full $163.84 tip credit, and the diner pays Priya $68.16 in cash wages.

Example 2: Tips fall short of the minimum wage

Marcus is a busser who worked 30 hours during a slow week.

Here’s how to calculate Marcus’s tip credit:

• Full minimum wage for the week: 30 × $7.25 = $217.50

• Cash wages plus tips: (30 × $2.13) + $120 = $183.90

• Hourly rate with tips: $183.90 ÷ 30 = $6.13 an hour, below $7.25

• Shortfall: $217.50 – $183.90 = $33.60

• Tip credit: $120, since the tip credit can’t be more than the tips Marcus actually received

Result: Elm Street Diner can only take a $120 tip credit, and pays Marcus $97.50 in cash wages ($63.90 + the $33.60 shortfall).

Common mistake to avoid: Averaging a slow week with a busy one. Even if Marcus makes enough tips next week to be well above the full minimum wage, Elm Street Diner still owes the $33.60 for this week.

Example 3: Tip credit on overtime hours

Leah is a bartender who worked 46 hours this week, including 6 hours of overtime.

Here’s how to calculate Leah’s tip credit:

• Cash wages for regular hours: 40 × $2.13 = $85.20

• Cash wages for overtime hours: 6 × $5.76 = $34.56 ($10.88 overtime rate, rounded from $10.875, minus the $5.12 tip credit)

• Tip credit: 46 × $5.12 = $235.52, which Leah’s $900 in tips covers

Result: Elm Street Diner can take a $235.52 tip credit, and pays Leah $119.76 in cash wages.

Tip credit and tip pooling: what’s allowed?

When an employer takes a tip credit, a tip pool can only include employees who customarily and regularly receive tips, like servers, bartenders, and bussers. Whether an employer takes a tip credit or not, the employer, managers, and supervisors cannot keep any part of employees’ tips.

What is tip pooling?

Tip pooling is a method where tipped employees combine some or all of their tips into a single, shared fund (the pool), with the funds then being distributed to a predetermined group of employees based on a formula (like hours worked or by role).

Can non-tipped employees join a tip pool when the employer takes a tip credit?

No. If an employer takes a tip credit, a mandatory tip pool can only include employees who customarily and regularly receive tips. Non-tipped employees, like cooks and dishwashers, can’t be included.

If an employer doesn’t take a tip credit and it pays all employees at least the full minimum wage in cash wages, they can include non-tipped employees like back-of-house staff in a mandatory tip pool.

Some states also have their own tip pooling rules, so employers should check their state’s requirements before setting up a tip pool.

How does tip pooling affect the tip credit?

Tip pooling can raise or lower the tips each employee takes home, which changes how much tip credit an employer can take for each person. Tips an employee receives from the pool count toward their tip credit, just like tips they receive directly from customers.

Since tip pooling redistributes tips across tipped employees, it might help an employee reach the full minimum wage for the week if they otherwise hadn’t received enough tips on their own. That means the employer can still apply the full tip credit for that employee, which wouldn’t have been possible before the tip pool redistributed the tips.

It can work the other way, too: if an employee contributes more to the pool than they receive, their total tips go down. 

Either way, the employer still has to make sure each employee’s cash wage (plus tips) reaches the full minimum wage every week. Calculating each person’s share of the pool is the first step — a free tip pooling calculator can split a pool and show what each employee takes home. 

Can managers and supervisors keep tips or join tip pools?

No. Under the FLSA, employers, managers, and supervisors can’t receive tips from a tip pool — regardless of whether or not the employer takes a tip credit. An employer also can’t keep any part of an employee’s tips for any reason, or require employees to give part of their tips to the employer, a supervisor, or a manager.

There’s one exception: an employer, supervisor, or manager can keep tips they receive in accordance with the FLSA, provided the tips come directly from a customer and are for the service “they directly and solely provide.”

Tip credit recordkeeping and reporting requirements

Employers who take a tip credit need to keep detailed records of each tipped employee’s tips, hours, and the tip credit claimed. They then need to hold onto those records for at least three years (or at least four years for employment tax records). 

Good records not only help businesses stay compliant, but they also help employers show that they paid employees correctly if a pay dispute or audit ever comes up.

What records do employers need to keep when taking a tip credit?

According to the FLSA, any employer claiming the tip credit needs to keep records of:

• Each employee whose wages are partly made up of tips

• The weekly or monthly tips each employee reports to the employer

• The amount of tip credit taken for each tipped employee

• Hours worked each day in non-tipped jobs, and the total daily or weekly straight-time pay for those hours

• Hours worked each day in tipped jobs, and the total daily or weekly straight-time earnings for those hours

If an employer does not take a tip credit — but still operates a mandatory tip pool — the FLSA requires them to keep records of:

• Each employee who receives tips

• The weekly or monthly tips each employee receives

How to report tips and tip credit in payroll

Employees report their tips to their employer, and the employer includes those tips in payroll. According to the IRS, employees who receive $20 or more in tips in a month must report them by the 10th of the following month. Employers then withhold income tax and the employee’s share of FICA taxes on reported tips, pay the employer’s share of FICA, and report tips on each employee’s Form W-2.

For a full breakdown of withholding on tips, payroll tax forms, and more, check out our guide to restaurant payroll.

How long to keep tip and payroll records

Employers need to keep payroll records for at least three years, and employment tax records — like employee tip reports — for at least four years. Some states require employers to keep records longer.

Note: While this section provides general information about payroll taxes, it is not financial or legal advice. For more insight into specific payroll obligations and to ensure compliance with all relevant tax laws, employers should consult with a tax professional.

Tip credit by state: 2026 rules for every state

Tip credit rules vary by state: some states follow the federal rates, some require a higher minimum wage or cash wage (which changes the maximum tip credit), and some don’t allow a tip credit at all. The actual tip rates vary by state, too. In Q2 2026, average card and digital tips at Toast restaurants ranged from 17.1% in California to 21.4% in Delaware.

When state and federal rules differ, employers have to follow whichever is more protective of employees. To find the current rates that apply to them, employers can check out the Department of Labor’s website for a list of minimum wages for tipped employees, broken down by each state.

Note: Rates in this section are current as of October 2026, based on the Department of Labor’s July 1, 2026 table and state updates since then. Minimum wage and tip credit laws change often, and some cities and counties set higher rates than their state. Employers should confirm current rates with their state and local labor offices.

States that follow federal tip credit rules

These states follow the federal tip credit rules: a $7.25 full minimum wage, a $2.13 cash wage, and a $5.12 maximum tip credit. Some of these states don’t have their own minimum wage law, so the federal rules apply.

• Alabama

• Georgia

• Indiana

• Kansas

• Kentucky

• Louisiana

• Mississippi

• North Carolina

• Oklahoma

• South Carolina

• Tennessee

• Texas

• Utah

• Wyoming

States with higher minimum wage or cash wage requirements

In these states (plus Washington, D.C.), employers have higher minimum wage requirements, higher cash wage requirements, or both. Because of this, they also have different tip credit maximums.

* Florida: Rates took effect September 30, 2026, when the state minimum wage rose from $14.00 to $15.00. Florida’s maximum tip credit stays fixed at $3.02, so the cash wage rose to $11.98.

* Hawaii: Employers can only take a tip credit if the employee’s cash wage plus tips adds up to at least $23.00 per hour, and the full $1.25 tip credit requires at least $8.25 per hour in tips (see the state’s tip credit notice for details).

*New York: Tipped wage rates vary by region and type of employer.

*Ohio: Applies to employers with annual gross receipts of $405,000 or more. Smaller employers follow a $7.25 minimum wage.

*West Virginia: The state minimum wage law only applies to employers with six or more employees.

States that don’t allow a tip credit

In these states, employers are required to pay tipped employees the full state minimum wage, in addition to any tips received:

FLSA tip credit vs. FICA tip credit: what’s the difference?

The FLSA tip credit is a payroll rule that allows an employer to pay their tipped employees a lower cash wage. The FICA tip credit is a federal tax credit that allows food and beverage businesses — and now beauty service businesses — to recover part of the Social Security and Medicare taxes (FICA taxes) they pay on employee tip income.

FLSA tip credit and FICA tip credit side-by-side

What is the FICA tip credit?

The FICA tip credit is a federal tax credit that helps qualifying businesses recover some of the Social Security and Medicare taxes they pay on employee tips. Employers owe their share of these taxes on the tips employees report to them, not just on the wages they pay.

Who is eligible for the FICA tip credit?

According to the IRS, these businesses qualify:

• Food and beverage businesses with tipped employees, if:

  • The employees get their tips from customers “for providing, delivering, or serving food or beverages.”

  • The employer “paid or incurred employer Social Security and Medicare taxes on those tips during the tax year.”

• Beauty service businesses: Under the Working Families Tax Cuts Act, the credit now also covers certain tips received by employees who provide barbering and hair care, nail care, esthetics, and body or spa treatment services.

How to calculate and claim the FICA tip credit

The FICA tip credit is based on the employer’s share of Social Security and Medicare taxes (7.65%) paid on tips above a set baseline: only tips beyond what’s needed to bring an employee’s pay up to $5.15 per hour count toward the credit. Employers claim the credit once a year by filing IRS Form 8846 with their business tax return. For step-by-step calculation details, see the instructions for Form 8846.

Note: While this section provides general information about payroll taxes, it is not financial or legal advice. For more insight into specific payroll obligations and to ensure compliance with all relevant tax laws, employers should consult with a tax professional.

Take the tip credit math off the to-do list

Tip credits, tip makeup, and tipped overtime all have to be calculated correctly every week, for every tipped employee. Toast Payroll & Team Management pulls hours and tips straight from Toast POS and handles the math automatically, including tip makeup to the minimum wage and overtime across multiple pay rates. It also flags issues like unapproved tips and auto clock-outs, so errors get caught before payday, giving busy operators more time to spend on the floor — instead of in spreadsheets.

Tip credit FAQs

What is the federal minimum wage for tipped employees in 2026?

The federal minimum wage for tipped employees is a $2.13 per hour cash wage in 2026, as long as the employee’s cash wage plus tips adds up to at least the $7.25 per hour full minimum wage. Many states require a higher cash wage, and some don’t allow a tip credit at all.

What is the maximum tip credit an employer can take in 2026?

The maximum federal tip credit in 2026 is $5.12 per hour, which is the $7.25 full minimum wage minus the $2.13 cash wage. State maximums vary, so employers should check their state’s rules.

Which tip credit laws apply: federal, state, or local?

Employers have to follow all of them: federal, state, and local tip credit laws. When the rules differ, employers must follow whichever is most protective of employees — which is usually the highest minimum wage, highest cash wage, or lowest tip credit.

How long do employers need to keep payroll records for tipped employees?

Employers need to keep payroll records for at least three years under the FLSA, and employment tax records, like employee tip reports, for at least four years under IRS rules. Some states require longer.

Do employers need to tell employees they’re taking a tip credit?

Yes. Before taking a tip credit, employers must tell tipped employees their cash wage, the amount of tip credit being claimed, and the other details required by the FLSA. Without this notice, an employer can’t claim the tip credit at all.

Does “no tax on tips” change how the tip credit works?

No. “No tax on tips” is a federal income tax deduction that lets eligible employees deduct up to $25,000 in qualified tips per year from 2025 through 2028. It doesn’t change the cash wage, the full minimum wage, or how much tip credit an employer can take, and tips are still subject to Social Security and Medicare taxes. For more help navigating restaurant payroll, check out the complete guide.

DISCLAIMER: This information is provided for general informational purposes only, and publication does not constitute an endorsement. Toast does not warrant the accuracy or completeness of any information, text, graphics, links, or other items contained within this content. Toast does not guarantee you will achieve any specific results if you follow any advice herein. It may be advisable for you to consult with a professional such as a lawyer, accountant, or business advisor for advice specific to your situation.