What Is a Tipped Wage? Federal Rules, Tip Credits, and Overtime

A tipped wage is a reduced hourly cash wage that employers are allowed to pay workers who regularly earn gratuities from customers. Under federal law that cash wage can go as low as $2.13 per hour, on the understanding that tips will lift total earnings to at least the $7.25 federal minimum wage. The difference between the two figures is called the tip credit, and it is what shifts part of the employer’s wage bill onto the customer.

The rest of this article walks through how that structure actually works: who qualifies, what the employer must do to use it, what happens when tips fall short, and how overtime, pooling, side work, deductions, and taxes fit around it.

Who Counts as a Tipped Employee

The Fair Labor Standards Act defines a tipped employee as someone working in a job where they customarily and regularly receive more than $30 per month in tips.¹ That threshold is deliberately low, so it captures servers, bartenders, hotel bellhops, valets, and similar customer-facing roles.

Workers who only occasionally receive tips, and don’t consistently clear $30 a month, are not tipped employees under the law. They must be paid the full minimum wage with no tip credit applied. The same goes for back-of-house roles like cooks and dishwashers. Even when they share in a tip pool, their occupations don’t customarily generate gratuities, so they can’t be classified as tipped employees.¹

How the Tip Credit Fills the Gap

The tip credit is the legal mechanism that lets an employer pay a cash wage below the standard minimum. The employer must pay at least $2.13 per hour in direct wages and can then claim up to $5.12 per hour as a tip credit against the $7.25 federal minimum.²

The credit is only valid to the extent tips actually cover it. If your cash wage plus your tips do not reach $7.25 per hour in a given workweek, your employer has to pay the difference on that week’s regular payday.² You are guaranteed the full federal minimum wage no matter how slow the shift.

An employer who fails to make up a shortfall is exposed to more than the missing wages. Under the FLSA, a worker can recover the unpaid amount plus an equal amount in liquidated damages, effectively doubling the liability.³ The Department of Labor can also impose separate civil money penalties for tip and minimum wage violations.⁴

The Notice You Should Receive

Before an employer can claim any tip credit, it must tell each tipped employee, in advance:

The direct cash wage it will pay (at least $2.13 per hour).
The amount it intends to claim as a tip credit (up to $5.12 per hour).
That the tip credit cannot exceed the tips the employee actually receives.
That all tips belong to the employee, except through a valid tip pool among workers who customarily receive tips.
That the tip credit itself doesn’t apply unless the employee has been given this notice.

Skip the notice and the employer forfeits the tip credit entirely. It then owes the full $7.25 minimum wage in cash for every hour worked, on top of letting the employee keep all tips.²

Overtime When You Earn a Tipped Wage

Tipped workers who put in more than 40 hours in a week earn overtime at one and a half times their regular rate. The regular rate is not the $2.13 cash wage. It’s the cash wage plus the tip credit the employer claims, together with any other non-tip pay such as commissions.⁵

So if the employer pays $2.13 and claims the full $5.12 credit, the regular rate is at least $7.25. The overtime premium is half of that added on top. Tips you receive above the tip credit amount don’t get folded into the regular rate calculation.⁵

Who Owns the Tips

Tips belong to the employee who earned them. Federal law bars employers, managers, and supervisors from keeping any part of an employee’s tips, whether or not the business takes a tip credit.⁶

Employers can require workers to share tips through a pool, but the rules split based on whether a tip credit is being used:

If the employer takes a tip credit, the pool can only include employees who customarily and regularly receive tips (servers, bartenders, bussers). Cooks and dishwashers can’t be in it.
If the employer does not take a tip credit, the pool may include non-tipped workers such as cooks and dishwashers.

Either way, owners, managers, and supervisors are permanently out of the pool.⁶ Pooled tips must be paid out no later than the regular payday for the workweek in which they were collected, or as soon as practicable if payroll timing makes exact calculation impossible before then. A pooling violation, including a manager taking a cut, can cost the employer the tip credit for every affected worker.

One more distinction matters here. A mandatory service charge added to the bill, like an automatic gratuity on a large party, is not a tip. It is income to the business, which can keep, share, or distribute it however it chooses.⁷ Any share of a service charge that reaches an employee does not count as a tip for tip credit purposes, and it is taxed as ordinary wages rather than as tip income.

Side Work and Second Jobs

Servers do plenty of tasks that don’t generate tips directly: rolling silverware, refilling condiments, wiping down tables, brewing coffee. The Department of Labor allows the tip credit to apply to that supporting work as long as it’s done alongside or near tip-producing duties.² Two limits apply:

If more than 20 percent of your weekly hours go to tip-supporting tasks, the tip credit can’t be applied to the hours over that cap.
If you spend more than 30 consecutive minutes on non-tip-producing work, the employer must pay the full minimum wage for that entire block.

Fully unrelated work follows a different rule. If a hotel employee works as both a server and a maintenance worker, the tip credit applies only during server hours; maintenance time must be paid at the full minimum wage.¹

Deductions From Your Tips

When a tip is left on a credit card, the employer may deduct the card company’s processing fee from it before paying the employee. A 3 percent transaction fee means the employee can be paid 97 percent of the charged tip. The deduction can’t be more than the fee actually charged, and it can’t drop the worker’s total pay below the minimum wage counting any tip credit claimed.² Credit card tips still have to be paid by the regular payday; the employer can’t sit on them waiting for the card company. Some states ban these fee deductions outright.

Uniform costs work the same way. If your employer requires a specific uniform, it can’t deduct the cost from your pay to the extent that doing so would pull your wages below the minimum. Because tipped workers already start at a reduced cash wage, even a small uniform charge can create a violation.⁸

Taxes on Tipped Income

Tips are taxable income. If you receive $20 or more in cash tips during a calendar month, you must report the total to your employer by the 10th of the following month, so the employer can withhold federal income tax, Social Security, and Medicare.⁷ Tips of less than $20 in a month don’t have to be reported to the employer, but they still belong on your annual tax return.⁹

The No Tax on Tips Deduction

Starting with tax year 2025, eligible tipped workers can deduct up to $25,000 in qualified tips from taxable income. The deduction is available whether you itemize or take the standard deduction, and it phases out above $150,000 for individual filers and $300,000 for joint filers.¹⁰

The deduction is narrower than the name suggests. Social Security and Medicare taxes still apply to your tip income, and the deduction only reduces federal income tax. Tips must still be reported to your employer and included on your return.

State Rules Can Raise the Floor

The $2.13 federal cash wage is a floor, not a ceiling. Many states set a higher required cash wage for tipped workers, and some have eliminated the tip credit entirely, requiring employers to pay the full state minimum wage regardless of tips. Cash wages for tipped employees run from the federal $2.13 up to more than $17 an hour depending on the state.

Where federal and state law differ, the employer has to follow whichever rule is more favorable to the worker.¹¹ Before assuming the federal numbers describe your paycheck, check your own state’s rule.

1
eCFR. 29 CFR Part 531 Subpart D – Tipped Employees
2
U.S. Department of Labor. Fact Sheet 15 – Tipped Employees Under the Fair Labor Standards Act (FLSA)
3
Office of the Law Revision Counsel. 29 U.S. Code 216 – Penalties
4
U.S. Department of Labor. Civil Money Penalty Inflation Adjustments
5
eCFR. 29 CFR 531.60 – Overtime Payments
6
eCFR. 29 CFR 531.54 – Tip Pooling
7
Internal Revenue Service. Tip Recordkeeping and Reporting
8
eCFR. 29 CFR Part 531 – Wage Payments Under the Fair Labor Standards Act of 1938
9
Internal Revenue Service. Topic No. 761 – Tips, Withholding and Reporting
10
U.S. Department of the Treasury. Treasury and IRS Issue Proposed Regulations Around No Tax on Tips
11
U.S. Department of Labor. Minimum Wages for Tipped Employees