New Tip Laws Explained: Tip Credit, Pooling, and Service Charges

Two recent developments have reshaped the new tip laws that affect servers, bartenders, and other tipped workers, but the underlying Fair Labor Standards Act framework is largely intact. In May 2025, the Senate unanimously passed the No Tax on Tips Act, which would let eligible workers deduct up to $25,000 of tip income from their federal taxes if it becomes law.¹ In December 2024, the Department of Labor scrapped the 80/20/30 rule that had capped how much time tipped workers could spend on non-tip-producing side work.² Everything else — who owns your tips, how pools must be structured, what your employer can deduct, and how overtime is calculated — still runs on the FLSA rules that have been on the books for years.

The No Tax on Tips Act Is Not Yet Law

The No Tax on Tips Act (S.129) passed the Senate without amendment by unanimous consent on May 20, 2025, and is currently held at the desk in the House of Representatives.¹ It has not passed the House and has not been signed into law, so no one can claim this deduction on a current return.

If enacted, eligible workers could deduct up to $25,000 per year in cash tips from federal income tax. The deduction would apply only to tips received in an occupation that customarily receives them, and only to tips reported to the employer for payroll tax purposes. Workers whose total compensation exceeded $160,000 in the prior tax year (adjusted annually for inflation) would be cut out.¹ The bill would also extend an existing employer payroll-tax credit to beauty service occupations like barbering, nail care, and spa treatments.

The 80/20/30 Rule Is Gone

On December 17, 2024, the DOL published a final rule removing the 80/20/30 framework and restoring the older dual jobs standard.² The 2021 rule had required employers to pay full minimum wage whenever a tipped employee’s non-tip-producing support work exceeded 20 percent of weekly hours or lasted more than 30 consecutive minutes. That cap no longer applies.

Under the current dual jobs rule at 29 CFR 531.56(e), the question is whether an employee holds two genuinely separate occupations or one tipped occupation with related side duties. A hotel worker who is both a maintenance person and a waiter holds two distinct jobs, and the employer can apply the tip credit only during waiter hours. A server who rolls silverware, sets tables, and makes coffee is doing related duties within a single tipped occupation, and the tip credit can apply for all of those hours.² There are no longer hard percentage or time-based limits at the federal level, though some states keep their own restrictions.

Who Owns Your Tips

Every tip a customer leaves belongs to the employee who earned it. Under 29 CFR 531.52, an employer cannot keep any portion of an employee’s tips for any purpose, regardless of whether it takes a tip credit.³ The only permitted uses are returning tips to the worker who earned them, distributing tips through a lawful pool, or facilitating a pool by collecting and redistributing.

Owners, managers, and supervisors are barred from taking any share of employee tips. The law defines “manager or supervisor” using the same duties test that applies to executive exemptions: the person’s primary duty must be managing the business or a department, they must regularly direct at least two full-time employees, and they must have authority over hiring or firing decisions.⁴ The title on the schedule does not decide it. A shift lead who meets all three tests is a manager for tip purposes; an “assistant manager” without real supervisory authority may not be. Managers can keep tips they personally earn from customers they directly and solely serve, but they cannot draw from anyone else’s tips or a pool.³

Credit Card Processing Fees

When a customer tips on a card, the employer may deduct the actual transaction fee charged by the card company from that tip. If the processor charges 3 percent, you receive 97 percent of the card tip.⁵ The employer cannot deduct more than the actual fee, cannot use the deduction to push hourly pay below minimum wage, and cannot withhold card tips while waiting on reimbursement from the processor. Card tips must reach you by the next regular payday.

The Tip Credit and What Kills It

The tip credit lets an employer pay a cash wage as low as $2.13 per hour, on the expectation that tips will lift total earnings to at least $7.25, the federal minimum wage. The maximum tip credit is $5.12 per hour.⁵ Before taking the credit, the employer must tell you five things: the exact cash wage being paid, the tip credit amount claimed, that the credit cannot exceed tips actually received, that you keep all tips except for lawful pooling, and that the credit does not apply unless you have been informed of these provisions.⁶

If your tips plus $2.13 do not reach $7.25 in a given workweek, the employer must pay the difference out of pocket.⁵ Skipping the required notice or the shortfall makeup kills the tip credit entirely. When that happens, the employer owes full minimum wage for every hour worked, not just the gap.

Deductions can also destroy the credit. Employer-required costs for uniforms, aprons, broken dishes, walkouts, and register shortages violate federal law if they drop your effective wage below the minimum.⁷ Because you already earn a sub-minimum cash wage, even small charges can cross the line.

Tip Pooling Rules

Pool composition depends on whether the employer takes a tip credit. When a credit is claimed, the pool can include only workers who customarily and regularly receive tips, such as servers, bartenders, and bussers. Back-of-house workers like cooks and dishwashers must be excluded.⁸

When the employer pays the full minimum wage and takes no tip credit, the pool may include non-tipped employees, including kitchen staff.⁸ Managers and supervisors are locked out either way. They may contribute their own personally earned tips to a pool but can never receive a distribution from one.

Mandatory Service Charges Are Not Tips

An automatic gratuity added to a large party or an event service fee is not a tip under federal law. The IRS uses four factors to draw the line: the payment must be voluntary, the customer must control the amount, the payment cannot be dictated by employer policy, and the customer should generally choose who receives it. If any factor is missing, the payment is a service charge.⁹

Service charges are treated as regular wages. The employer must include them in W-2 wages, withhold income and payroll taxes on them, and cannot count them toward the tip credit. A restaurant’s automatic 18 percent charge distributed to staff is a wage payment from the employer, not a customer tip, even if it lands in the same pocket.

Overtime for Tipped Workers

Overtime for tipped workers uses the full minimum wage, not the $2.13 cash wage. The regular rate of pay includes the tip credit amount, cash wages, and any other non-tip compensation, and the employer owes time-and-a-half on that regular rate, minus the tip credit.¹⁰ For a worker at the federal tipped minimum, the overtime cash wage works out to $5.76 per hour.

When a tipped worker holds two jobs at different pay rates in one week, the employer calculates a weighted average of all straight-time earnings divided by total hours to find the regular rate, then pays half that rate on top of regular pay for each overtime hour.¹¹ Getting overtime wrong for tipped workers is one of the most common wage violations, partly because the math is unintuitive and partly because payroll systems are often not configured for it by default.

Recordkeeping

Employers must keep specific payroll records for every tipped employee. Under 29 CFR 516.28, those records must identify each tipped worker, show weekly or monthly tips reported (often on IRS Form 4070), document the tip credit amount claimed, and separately track hours in tipped versus non-tipped occupations.¹² All payroll records must be preserved at least three years from the last date of entry.¹³

Employees have their own reporting duty. If you receive $20 or more in tips in a calendar month, you must report those tips to your employer.¹⁴ The IRS provides Form 4070 and Publication 1244 for daily tracking.¹⁵

What You Can Recover for a Violation

The FLSA gives tipped workers two layers of financial recovery. First, the employer owes the actual unpaid wages, whether that is the tip credit amount, withheld tips, or the gap between the sub-minimum wage and the full minimum. Second, the employer owes an equal amount in liquidated damages, effectively doubling the recovery. For tip-keeping violations specifically, the employer is liable for both the tip credit taken and all tips unlawfully kept, plus an equal amount in liquidated damages on top of that.¹⁶

Workers can file claims going back two years, or three years if the violation was willful. The Department of Labor can also pursue claims on behalf of employees and impose civil money penalties on employers who repeatedly or willfully violate the law.

State Law Can Be Stricter

Federal tip law is a floor, not a ceiling. Seven states prohibit the tip credit entirely, requiring employers to pay the full state minimum wage before tips: Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington. In those states, tips sit entirely on top of your base wage, and the $2.13 federal tipped minimum is irrelevant. Other states set their own tipped minimum wage somewhere between $2.13 and the full state minimum, and some impose stricter rules on pooling or side work. The more protective standard controls whenever state law exceeds federal law, so always check your state’s requirements before relying on the federal rules alone.

1
Congress.gov. S.129 – No Tax on Tips Act 119th Congress (2025-2026)
2
Federal Register. Tip Regulations Under the Fair Labor Standards Act (FLSA) Restoration of Regulatory Language
3
eCFR. 29 CFR 531.52 – General Restrictions on an Employer’s Use of Its Employees’ Tips
4
U.S. Department of Labor. Fact Sheet 15B – Managers and Supervisors Under the Fair Labor Standards Act and Tips
5
U.S. Department of Labor. Fact Sheet 15 – Tipped Employees Under the Fair Labor Standards Act
6
Office of the Law Revision Counsel. 29 USC 203 – Definitions
7
U.S. Department of Labor. Fact Sheet 16 – Deductions From Wages for Uniforms and Other Facilities Under the Fair Labor Standards Act (FLSA)
8
eCFR. 29 CFR 531.54 – Tip Pooling
9
Internal Revenue Service. Interim Guidance on Rev. Rul. 2012-18 Announcement 2012-25
10
eCFR. 29 CFR 531.60 – Overtime Payments
11
U.S. Department of Labor. Fact Sheet 23 – Overtime Pay Requirements of the FLSA
12
eCFR. 29 CFR 516.28 – Tipped Employees and Employer-Administered Tip Pools
13
eCFR. 29 CFR 516.5 – Records to Be Preserved 3 Years
14
Internal Revenue Service. Employer’s Tax Guide (Circular E)
15
Internal Revenue Service. A Guide to Tip Income Reporting for Employees Who Receive Tip Income
16
Office of the Law Revision Counsel. 29 USC 216 – Penalties