If you run a restaurant, bar, salon or any business where staff get tips, the tip credit decides what you must pay in cash each hour. It is also the line on payroll most often done wrong: the credit only counts if tips actually covered it, and only if you told the employee about it first. This post covers the federal rule from Department of Labor Fact Sheet #15, the state rates from the DOL's own state table, and what goes on the pay stub.
What is a tip credit?
It is the part of the minimum wage you are allowed to meet with the employee's tips rather than your own money. Fact Sheet #15 says an employer may pay a tipped employee a direct cash wage of at least $2.13 an hour and claim a tip credit of up to $5.12 an hour, which is the gap to the $7.25 federal minimum wage.
Only tipped employees count. The federal definition is a worker in an occupation where they customarily and regularly receive more than $30 a month in tips. A mandatory service charge, such as 15% added to a large party's bill, is not a tip under the same fact sheet; it is your money, and it can count toward wages, but it doesn't make anyone a tipped employee.
| Item | Federal figure |
|---|---|
| Minimum wage | $7.25 an hour |
| Minimum cash wage you pay | $2.13 an hour |
| Maximum tip credit | $5.12 an hour |
| Who is a tipped employee | More than $30 a month in tips, customarily and regularly |
The conditions that come with the credit
You can't take the credit just by paying $2.13. Fact Sheet #15 says you must first tell the employee, orally or in writing, five things:
- The cash wage you will pay, at least $2.13 an hour.
- The amount of tip credit you will claim, up to $5.12 an hour.
- That the credit can't be more than the tips the employee actually receives.
- That the employee keeps all their tips, except through a valid tip pool among employees who customarily receive tips.
- That the credit doesn't apply unless the employee has been told these rules.
Two more rules matter week to week. If cash wage plus tips doesn't reach $7.25 an hour for the workweek, you make up the difference by the regular payday for that period. And you may never keep any of the tips yourself, whether or not you take a credit. Managers and supervisors can't take from a tip pool either, though they keep tips a customer gives them directly for service they alone provided.
Credit card tips: Fact Sheet #15 lets you deduct the card company's fee on the tip, and no more than that fee, as long as it doesn't take wages below the minimum and the tip is paid by the regular payday. Some states don't allow the deduction at all.
A worked example: when you have to top up
Say a server in a state that follows the federal rate works 30 hours in a slow week and reports $120 in tips. The minimum for the week is 30 × $7.25 = $217.50. Your cash wage is 30 × $2.13 = $63.90. Cash wage plus tips comes to $183.90, which is $33.60 short. You pay that $33.60 as extra wages on the regular payday for that week.
Overtime is worked out on the full minimum wage, not the cash wage. Fact Sheet #15 says you can't take a bigger tip credit for overtime hours than for straight-time hours. So the overtime rate is 1.5 × $7.25 = $10.875, and after the same $5.12 credit the cash wage for each overtime hour is $5.755, which rounds to $5.76. Our post on how to calculate overtime walks through the regular rate in more detail.
Tipped minimum wage by state in 2026
State law wins where it is better for the worker, so the federal $2.13 is the floor, not the norm. The DOL's state table, dated 1 July 2026, sorts states into three groups.
| State | Cash wage per hour |
|---|---|
| Alaska | $14.00 |
| California | $16.90 |
| Minnesota | $11.41 |
| Montana | $10.85 (businesses with sales over $110,000) |
| Nevada | $12.00 |
| Oregon | $15.55 standard, $16.80 Portland metro, $14.55 nonurban |
| Washington | $17.13 |
| State | Minimum wage | Max tip credit | Cash wage |
|---|---|---|---|
| Arizona | $15.15 | $3.00 | $12.15 |
| Colorado | $15.16 | $3.02 | $12.14 |
| Connecticut (hotel and restaurant) | $16.94 | $6.38 | $10.56 |
| District of Columbia | $18.40 | $8.10 | $10.30 |
| Florida (from 30 September 2026) | $15.00 | $3.02 | $11.98 |
| Hawaii | $16.00 | $1.25 | $14.75 |
| Illinois | $15.00 | $6.00 | $9.00 |
| Maryland | $15.00 | $11.37 | $3.63 |
| Massachusetts | $15.00 | $8.25 | $6.75 |
| Michigan | $13.73 | $8.24 | $5.49 |
| New Jersey | $15.92 | $9.87 | $6.05 |
| Pennsylvania | $7.25 | $4.42 | $2.83 |
The states that match the federal $2.13 cash wage on the same table are Alabama, Georgia, Indiana, Kansas, Kentucky, Louisiana, Mississippi, Nebraska, North Carolina, Oklahoma (for most employers), South Carolina, Tennessee, Texas, Utah, Virginia and Wyoming. Some of them have a higher state minimum wage, which means a bigger credit: Nebraska's $15.00 minimum gives a $12.87 credit, Virginia's $12.77 a $10.64 credit.
The Florida row uses the DOL table's own footnote, which says Florida's minimum wage reaches $15.00 on 30 September 2026, and the $3.02 credit the table lists. Michigan's minimum rises to $15.00 on 1 January 2027 and other states change on that date too, so check your state labor office before the first payroll of 2027. New York sets its tipped cash wage by region and employer type. The DOL notes its table is a summary and the state labor office has the official figures.
Florida paycheck calculator Michigan paycheck calculator Georgia paycheck calculator
What the pay stub must show for tipped staff
Federal law doesn't require a pay stub at all; the Department of Labor's FLSA FAQ says so directly. It does require records, and Fact Sheet #15 lists the extra ones for an employer taking a tip credit: which employees are paid partly through tips, the tips each one reported, the amount you treat as tip credit, and the hours and straight-time pay for tipped and non-tipped work each day.
Most states require a pay statement, so in practice the stub is where those records meet the employee. A clear tipped stub shows:
- Hours worked, split into tipped and non-tipped work if the employee does both (Fact Sheet #15's dual jobs rule: the credit applies only to hours in the tipped occupation).
- The cash wage rate and the cash wages for the period.
- Reported tips on their own line. IRS Topic no. 761 says employees who receive $20 or more in cash tips in a month must report them to you in writing by the 10th of the next month, and you withhold income tax, Social Security and Medicare on wages plus reported tips.
- Any tip credit make-up pay as a separate earnings line, so the employee can see you met the minimum.
- Deductions and net pay. Because reported cash tips are already in the employee's pocket, net pay on the check is often small, and sometimes zero.
When wages are too small to cover the withholding, Topic no. 761 sets an order: first the taxes on regular wages, then Social Security and Medicare on tips, then income tax on tips. Social Security and Medicare you couldn't collect by the 10th of the following month go on Form 941 as an adjustment and on the employee's W-2.
Tip credit and the no tax on tips deduction
They are separate rules. The tip credit is a wage rule from the Department of Labor about what you pay in cash. The no tax on tips deduction is an income tax rule the employee claims on their own return, and it changes what you report at year end, not the cash wage. Our no tax on tips post covers who qualifies and what the W-2 needs.
Where PayDocs fits
PayDocs makes the pay stub from your payroll figures. The generator has a one-tap "Tips" earnings line, so reported tips sit on their own row beside hours and the cash wage, and you can add a second line for any minimum wage make-up. PayDocs works out federal income tax, Social Security, Medicare and supported state taxes for 2026 pay dates (see what we calculate). Every line is editable, and the preview is free.
PayDocs doesn't decide whether you can take a tip credit, track tip reports or file Form 941. This is general information, not legal or tax advice; your state labor office has the official rates.
Questions
What is a tip credit?
It is the part of the minimum wage an employer may meet with a tipped employee's tips. Federally in 2026 you pay at least $2.13 an hour in cash and may count up to $5.12 an hour of tips, reaching the $7.25 minimum.
Which states don't allow a tip credit?
On the Department of Labor's table dated 1 July 2026: Alaska, California, Minnesota, Montana (larger businesses), Nevada, Oregon and Washington require the full state minimum wage before tips. Guam does too.
What happens if tips don't cover the tip credit?
You pay the difference. If cash wage plus tips is below $7.25 an hour for the workweek, or the state minimum, you make up the shortfall by the regular payday for that period.
Can I take a tip credit without telling the employee?
No. Fact Sheet #15 says you must first tell the employee the cash wage, the credit you claim, that the credit can't exceed their tips, that they keep their tips, and that the credit needs this notice. Without it, you pay the full minimum wage.
How is overtime worked out for a tipped employee?
On the full minimum wage. Federally that is 1.5 × $7.25 = $10.875 an hour, less the same $5.12 credit, so the cash wage for each overtime hour is about $5.76.
Do tips go on the pay stub?
Reported tips should, because you withhold tax on them. Federal law doesn't require a pay stub, but most states require a pay statement, and showing tips, cash wage and any make-up pay on separate lines lets the employee check the minimum was met.
Sources
- U.S. Department of Labor: Fact Sheet #15, Tipped Employees Under the FLSA
- U.S. Department of Labor: Minimum wages for tipped employees (table dated 1 July 2026)
- IRS: Topic no. 761, Tips, withholding and reporting (updated 24 September 2026)
- U.S. Department of Labor: Questions and answers about the FLSA
Sources checked October 8, 2026. This article explains how pay documents work; it is not tax or legal advice.
