A restaurant runs the same payroll as any employer, plus a layer most businesses never see: tips that pass through the till, tips handed over in cash, tip pools, service charges and a cash wage below the minimum wage. This post walks through the federal rules from the Department of Labor (DOL) and the IRS, works an overtime example for a tipped server and lists what each pay stub should show. State law often asks for more, and when it does, the rule that protects the employee more applies.
How does the tip credit work?
The tip credit lets you count part of a tipped employee's tips toward the federal minimum wage. DOL Fact Sheet #15 says you must pay a cash wage of at least $2.13 an hour, and the maximum tip credit you can claim is $5.12 an hour, which together make the $7.25 federal minimum.
- Who counts as tipped: an employee who customarily and regularly receives more than $30 a month in tips.
- If tips fall short: when cash wage plus tips don't reach $7.25 for every hour, you make up the difference on the regular payday for that workweek.
- Your state may differ: some states require a higher cash wage than $2.13, and where state law differs you follow the standard most protective to the employee.
Before you take a tip credit, you must tell the employee five things, orally or in writing: the cash wage you pay, the tip credit you claim, that the credit can't exceed the tips they actually receive, that they keep all their tips except through a valid tip pool, and that the credit doesn't apply unless they've been told all this.
Tip pools, service charges and card fees
The FLSA prohibits employers from keeping any part of employees' tips, whether or not you take a tip credit. Fact Sheet #15 sets out how tips may be shared.
| Situation | Rule |
|---|---|
| Traditional tip pool, tip credit taken | Only employees who customarily and regularly receive tips, such as servers, bussers, counter staff and service bartenders |
| Nontraditional pool (e.g. including cooks) | Allowed only if every worker is paid at least the full federal minimum wage in cash and no tip credit is taken |
| Managers and supervisors | May not receive tips from the pool; may keep only tips received directly for service they alone provide |
| Compulsory service charge (e.g. 15% of the bill) | Not a tip; it is the employer's money, and what you pass to staff is wages |
| Card processing fee on tips | May be passed on, but tips may not be cut by more than the actual fee |
The IRS treats service charges the same way: its tip recordkeeping page says service charges distributed to employees must be treated as wages. On the pay stub they belong in earnings, not with tips.
How tips are reported and taxed
Employees must report cash tips to you by the 10th of the month after they receive them, unless they total less than $20 for the month from your business. The IRS says any written record with the required details will do.
- Withholding: you withhold income tax and the employee's Social Security and Medicare tax on reported tips, and pay the employer's share.
- Form W-2: reported tips go in box 1 and box 5, and in box 7 as Social Security tips.
- New for 2026: the IRS W-2 instructions add box 12 code TP for total cash tips reported to the employer, and box 14b for the employee's Treasury Tipped Occupation Code.
- Allocated tips: a large food or beverage establishment whose reported tips fall below 8% of gross receipts allocates the difference among tipped employees; allocated tips go in box 8 and aren't withheld on.
- Form 8027: required for establishments where tipping is customary, serving food or drink on the premises (not fast food), that normally employed more than 10 employees on a typical business day in the previous year.
- Credit: you may be able to claim the credit for employer Social Security and Medicare taxes paid on certain tips, on Form 8846.
The federal deduction for qualified tips, in place for 2025 through 2028, is claimed by the employee on their own return. It doesn't change your withholding, which is why our post on no tax on tips covers it separately.
Overtime for tipped employees, worked through
Overtime for a tipped employee is worked out on the full minimum wage, not on the $2.13 cash wage. Fact Sheet #15 says you may not take a larger tip credit for an overtime hour than for a straight-time hour.
| Step | Working | Amount |
|---|---|---|
| Overtime rate on the full minimum wage | $7.25 × 1.5 | $10.875 an hour |
| Less the same tip credit as straight time | $10.875 − $5.12 | $5.755 cash an hour |
| Straight-time cash wages | 40 hours × $2.13 | $85.20 |
| Overtime cash wages | 5 hours × $5.755 | $28.78 (rounded) |
| Cash wages for the week | $85.20 + $28.78 | $113.98, plus tips |
If your state sets a higher minimum wage or cash wage, the same steps use your state's figures. Our overtime calculator does the time-and-a-half arithmetic for any rate.
What should a restaurant pay stub show?
The Department of Labor's FLSA FAQ says federal law requires accurate records of hours and wages but not a pay stub. Many states do require one and name what it must show. For tipped staff, a clear stub lets the employee check that the tip credit, overtime and withholding on tips are right.
- Hours worked, split between tipped work and any non-tipped work at a different rate.
- The cash wage rate and the overtime rate actually paid.
- Tips reported by the employee for the period (cash tips and card tips), and the tip credit taken, where your state requires it.
- Service charges paid out, as wages.
- Federal income tax, Social Security and Medicare withheld, worked out on wages plus reported tips, and state and local withholding.
- Net pay, which can be small when most of the gross is tips the employee already holds.
- Year-to-date totals, so the W-2 at year end matches the stubs.
Our guide to pay stub requirements by state lists which states require a stub and what it must contain. If you run payroll yourself, you can build each stub in the pay stub generator.
Pay stubs for restaurants, with a tipped sample stub Pay stub requirements by state
Where PayDocs fits
PayDocs makes the pay stub from your payroll figures, with lines for regular and overtime hours, reported tips and each amount withheld, plus year-to-date totals. PayDocs works out federal income tax, Social Security, Medicare and supported state taxes for 2026 pay dates (see what we calculate). It doesn't track tips, take a tip credit or file anything; those stay in your payroll process. Previewing is free and a PDF is $4.99 per pay stub once checkout opens.
This is general information about federal rules for employers, not tax or legal advice. State and local rules can add to it.
Questions
How does the tip credit work?
Under federal law you pay at least $2.13 an hour in cash and may count up to $5.12 an hour of the employee's tips toward the $7.25 minimum wage, after giving the required notice. If tips fall short, you make up the difference. Some states require more.
Are service charges tips?
No. The DOL says a compulsory service charge is not a tip, and the IRS says service charges paid to employees are wages. They go in earnings on the pay stub and are taxed as wages.
Do I withhold tax on my servers' tips?
Yes. On tips the employee reports to you, you withhold income tax and the employee's Social Security and Medicare tax, and pay the employer's share. Employees report cash tips by the 10th of the next month unless under $20.
How do I calculate overtime for a tipped employee?
Use the full minimum wage: $7.25 × 1.5 = $10.875 an hour federally, less the same tip credit you take for straight time ($5.12). That leaves $5.755 an hour in cash wages for each overtime hour.
What should a restaurant pay stub show?
Hours and rates, overtime, reported tips, any service charges paid as wages, each tax withheld on wages plus tips, net pay and year-to-date totals. Many states add their own required items, including the tip credit.
Sources
- US Department of Labor: Fact Sheet #15, Tipped employees under the FLSA
- IRS: Tip recordkeeping and reporting
- IRS: General Instructions for Forms W-2 and W-3 (2026)
- US Department of Labor: FLSA questions and answers (are pay stubs required?)
- IRS: Publication 15 (2026), Employer's Tax Guide
Sources checked October 8, 2026. This article explains how pay documents work; it is not tax or legal advice.
