Tipped minimum wage lets an employer pay a lower direct cash wage to employees who regularly earn tips, as long as tips make up the rest to reach the full minimum wage. Here's exactly how that works, state by state.
What Is Tipped Minimum Wage?
It's a lower hourly cash wage, set separately from the standard minimum wage, that applies specifically to "tipped employees," workers like servers and bartenders who customarily and regularly receive more than $30 a month in tips. The federal tipped minimum wage is $2.13/hr, versus the $7.25/hr standard federal rate.
A "tip credit" under the Fair Labor Standards Act is the portion of an employee's tips an employer is legally permitted to count toward meeting the full minimum wage obligation, capped at the difference between the tipped cash wage and the full minimum wage.
How Does the Tip Credit Work?
The gap between the tipped cash wage and the full minimum wage is called the "tip credit," the amount of tips the employer is allowed to count toward meeting the full minimum wage. Federally, that's up to $5.12/hr. If direct cash wages plus tips reach at least the full minimum wage in a given workweek, the employer has met its obligation. If they don't, the employer is legally required to pay the shortfall directly.
A Worked Example of the Tip Credit
The math is easier to follow with real numbers. Take a server working a standard 40-hour week under the federal rules, paid the $2.13/hr tipped cash wage.
Direct cash wages for the week: 40 hours × $2.13 = $85.20. The full minimum wage requirement for the same 40 hours: 40 hours × $7.25 = $290.00. That leaves a $204.80 gap that tips need to close.
If the server earns $220 in tips that week, total pay comes to $85.20 + $220 = $305.20, which clears the $290.00 floor, so the employer owes nothing further. The employer's tip credit claim is still capped at $5.12/hr regardless of how much the server actually earned; that cap limits what the employer can count, not what the worker keeps.
Now suppose the server only earns $150 in tips that week. Total pay would be $85.20 + $150 = $235.20 against the $290.00 requirement, a $54.80 shortfall. The employer must pay that $54.80 directly, on top of the $85.20 already paid in cash wages, to bring the worker up to the full minimum wage for that workweek.
Who Qualifies as a "Tipped Employee"?
The tip credit doesn't apply to any worker who happens to pick up an occasional tip. Federal law limits it to employees who "customarily and regularly" receive more than $30 a month in tips, meaning tipping is a routine, expected part of the job rather than a rare occurrence. Servers, bartenders, and valets typically clear this bar; a warehouse worker who receives a one-time tip from a customer generally does not.
This distinction matters because employers cannot use tip credits or tip pools to reduce labor costs for roles that don't customarily interact with tipping customers. Back-of-house staff, such as cooks and dishwashers, don't meet the "customarily and regularly tipped" standard even if a restaurant tries to route a share of tips to them, and including them in a mandatory tip pool can void the tip credit for the entire pool.
How Tipped Wage Rules Differ by State
State tipped-wage laws generally sort into three broad categories. The first group follows the federal system exactly, using the $2.13/hr tipped cash wage and allowing employers to claim up to the full $5.12/hr federal tip credit, with no separate state-specific figure layered on top. The second group sets its own tipped cash wage, higher than the federal $2.13 floor, but still permits a tip credit for the gap between that higher tipped wage and the state's full minimum wage, with the size of the allowed credit varying by state. The third group eliminates the tip credit entirely, requiring the full state minimum wage in cash no matter how much a worker earns in tips, covered in detail below.
Which States Don't Allow a Tip Credit?
Seven states require the full minimum wage in cash regardless of tips: Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington. In these states, tipped employees keep 100% of their tips on top of the full state minimum wage, with no offset. See our full state-by-state tipped wage table for every state's exact rate.
What Happens If My Tips Don't Add Up to Minimum Wage?
The employer must pay the difference for that specific workweek. This "make-up" obligation is calculated per workweek, not averaged over a pay period or across multiple weeks, so a slow week can't be offset against a busy one.
Employer Record-Keeping Obligations
Claiming a tip credit isn't a one-time declaration; it comes with an ongoing record-keeping burden. Employers must track, for each tipped employee and each pay period, the hours worked, the direct cash wage actually paid, and the specific tip credit amount claimed, and must be able to show the employee's actual tips met or exceeded the credit claimed, since the true-up requirement is enforced retroactively. If an employer can't produce those records, in a Department of Labor audit or a wage claim brought by an employee, it can lose the right to the credit and owe back wages up to the full minimum wage for the period in question. This is one reason many employers rely on point-of-sale systems that log credit card tips directly against payroll, since cash tips are harder to document after the fact.
Does Tipped Minimum Wage Apply to Delivery Drivers?
Only if they customarily and regularly receive more than $30 a month in tips and the employer follows the same notice and recordkeeping rules required for any tipped role. Many delivery drivers who spend most of their time driving rather than interacting with customers may not clear that bar, and some employers pay drivers the full minimum wage instead.
What Notice Must an Employer Give Before Taking a Tip Credit?
Before applying a tip credit, federal law requires the employer to inform the employee, in advance, of the direct cash wage being paid, the amount of tip credit being claimed, and that the employee is entitled to keep all tips received except through a valid tip pool. An employer that skips this notice loses the right to claim the tip credit at all and must pay the full minimum wage in cash.
The Push to End the Tip Credit
The seven no-tip-credit states above aren't an isolated trend. A growing number of states and cities have moved, or are actively moving, to phase out or eliminate the tip credit entirely, requiring tipped workers to receive the full minimum wage in cash before tips are even counted. This push is commonly known as the "One Fair Wage" movement. Supporters argue that relying on tips to reach minimum wage leaves income unpredictable and dependent on customer generosity, while opponents, often within the restaurant industry, argue it would force higher menu prices or reduced staffing. For a full breakdown of this policy debate, see our explainer on the One Fair Wage movement.
Frequently Asked Questions
What is the federal tipped minimum wage?
$2.13 per hour, the lowest direct cash wage an employer can pay a tipped employee under federal law, as long as tips bring total pay up to the full $7.25/hr federal minimum wage.
Can my employer take a tip credit without telling me?
No. Federal law requires advance notice of the cash wage, the tip credit amount, and your right to keep your tips. Skipping this notice forfeits the employer's right to the credit.
Do I keep 100% of my tips?
In the seven states with no tip credit, yes, on top of the full minimum wage. In tip-credit states, you keep your tips minus any valid tip pool contribution, but never less than the full minimum wage in total.
How is overtime calculated for tipped employees?
Off the full minimum wage, not the reduced tipped cash wage, at 1.5 times the regular rate for hours beyond 40 in a week. See our Florida tipped wage guide for a worked example.
Can back-of-house staff like cooks be included in a tip credit or tip pool?
No. The tip credit and mandatory tip pooling apply only to employees who customarily and regularly receive tips directly from customers, such as servers and bartenders. Including cooks, dishwashers, or other non-tipped staff in a mandatory tip pool can void the tip credit for the whole pool.
What records must an employer keep to claim the tip credit?
Employers must track each tipped employee's hours worked, the direct cash wage paid, and the tip credit amount claimed per pay period, and must be able to show actual tips received met or exceeded that amount. Inadequate records can void the credit and trigger back-wage liability.
For the official federal rules, see the US Department of Labor's tipped employee guidance. See the exact tipped minimum wage and tip credit for every state, or read our deep-dive guides for Florida and New York tipped wage rules.
