Tipped Minimum Wage

What is Tipped Minimum Wage?

Tipped minimum wage is the lower cash wage employers may pay workers who regularly earn tips, as long as tips make up the difference to reach the standard minimum wage. Under the Fair Labor Standards Act, a tipped employee is anyone who customarily receives more than $30 a month in tips, such as servers, bartenders, and valets.

Federal law sets this cash wage at $2.13 an hour, with employers taking a maximum tip credit of $5.12 to reach the $7.25 federal minimum wage. Payroll teams checking these thresholds often start from a standard hourly wage calculation before layering on tip credit rules.

How Does the Tip Credit Work?

The tip credit lets an employer count a portion of an employee's tips toward its minimum wage obligation instead of paying that amount in cash. Employers must confirm every workweek that cash wages plus tips reach at least $7.25 an hour, and cover any shortfall themselves.

What Must Employers Tell Tipped Employees Before Claiming the Credit?

The cash wage the employer will pay, which must be at least $2.13 an hour
The additional amount claimed as a tip credit, up to $5.12 an hour
That the employee must keep all tips, except for a valid tip pool
That the tip credit does not apply until the employee has been informed of these terms

Which States Require Employers to Pay the Full Minimum Wage?

Seven states — Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington — ban the tip credit entirely and require the full state minimum wage before tips. Many other states allow a tip credit but set a cash wage higher than the federal $2.13 floor.

Wage Treatment	Example States	Employer Requirement
No tip credit allowed	California, Washington, Nevada	Pay the full state minimum wage regardless of tips earned
Higher tipped cash wage	New York, Arizona, Florida	Pay a cash wage above $2.13; tips fill the remaining gap
Federal rate followed	Texas, Georgia, Wyoming	Pay a $2.13 cash wage; tips must cover the rest to $7.25

How Is Overtime Calculated for Tipped Employees?

Overtime for tipped workers is based on the full minimum wage, not the reduced cash wage, with the tip credit subtracted afterward. This produces a federal tipped overtime rate of roughly $5.76 an hour, a detail that trips up payroll teams unfamiliar with straight-time versus overtime rules for tipped roles.

Why Does Tipped Minimum Wage Matter for HR and Payroll Teams?

Misapplying the tip credit is one of the most common wage and hour violations, and small errors compound quickly across every workweek and every tipped employee. Getting gross pay and net pay right for tipped staff also protects trust, since net pay already looks unusual to first-time tipped workers.

Classification errors add to the risk: tipped roles are virtually always non-exempt, so treating one as a salaried, exempt position removes minimum wage and overtime protections it should still have.

What Changed With the No Tax on Tips Deduction?

A 2025 federal law created a temporary deduction of up to $25,000 for qualified tip income, separate from the minimum wage rules above. As Forbes has reported, the split between wages and tips still determines what counts, and employers still owe the same cash wage and tip credit obligations regardless of how tips are taxed on the employee's return.

HR Cloud's payroll and compliance tools track tip credit thresholds, state variations, and overtime math automatically, cutting down the manual work behind every tipped payroll run.

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Frequently Asked Questions

Q: What is the current federal tipped minimum wage?

A: The federal tipped minimum wage is $2.13 an hour, with a maximum tip credit of $5.12 to reach the $7.25 federal minimum wage.

Q: Can an employer pay less than $2.13 an hour to a tipped employee?

A: No. Federal law sets $2.13 as the lowest cash wage allowed, and employers must cover any shortfall if tips plus cash wages fall below $7.25 an hour, according to the U.S. Department of Labor.

Q: Which states don't allow a tip credit?

A: Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington require the full state minimum wage for tipped employees regardless of tips earned.

Q: How is overtime calculated for tipped employees?

A: Overtime is calculated on the full minimum wage before the tip credit is subtracted, not on the reduced cash wage, which produces a higher effective overtime rate.

Q: Does the tipped minimum wage apply to every tip-earning job?

A: No. It applies only to employees who customarily and regularly earn more than $30 a month in tips, the threshold the FLSA uses to define a tipped employee, as noted by SHRM and Indeed.