The tip offset on your paycheck is the portion of the minimum wage your employer is covering with your tips instead of paying you in cash. Under the Fair Labor Standards Act, an employer can pay a tipped worker a direct cash wage as low as $2.13 an hour, then count up to $5.12 an hour of your tips toward the $7.25 federal minimum wage. That $5.12 gap is the “tip credit” (also called the tip offset), and it should show up on your paystub as a distinct line so you can check the math.1U.S. Department of Labor. Fact Sheet 15 – Tipped Employees Under the Fair Labor Standards Act (FLSA)
How the Numbers Are Built
Three figures drive every tipped paycheck under federal law: the cash wage ($2.13 minimum), the tip credit the employer claims (up to $5.12), and the minimum wage they must add up to ($7.25). For a straight 40-hour week at the federal floor, the arithmetic looks like this:
- Cash wages: $2.13 × 40 = $85.20
- Tips needed to fill the credit: $5.12 × 40 = $204.80
- Total: $290.00, the same as $7.25 × 40
If your recorded tips for the week come in below $204.80, your employer has to add the shortfall to your paycheck. That makeup payment isn’t optional, and it isn’t averaged over a month or a pay period. The check has to be run workweek by workweek, and any week your tips fall short is a week the employer owes you cash to make up the difference.1U.S. Department of Labor. Fact Sheet 15 – Tipped Employees Under the Fair Labor Standards Act (FLSA)
You only count as a “tipped employee” under federal law if you regularly bring in more than $30 a month in tips. Below that, the employer cannot claim any offset and owes you the full minimum wage in cash.2eCFR. 29 CFR Part 531 Subpart D – Tipped Employees
Reading the Line on Your Paystub
A paystub for a tipped worker should separate three things: the cash wage the employer paid, the tips you reported, and the tip credit the employer is claiming against minimum wage. Some stubs also carry a “tip makeup” or “minimum wage adjustment” line for weeks where tips fell short.
Run the check yourself. Multiply your cash rate by hours worked. Add your reported tips. Divide by hours. If the result is at least $7.25 (or your state minimum, if higher), the offset is being applied correctly. If it isn’t, and there’s no makeup line bringing you up, you are being underpaid.
Paystubs that lump everything into a single number, with no breakout of cash wages versus tips versus credit, make this verification impossible. That’s worth raising with your employer directly. The whole point of the separate line items is so a worker can confirm they actually cleared minimum wage.
Overtime Is Where the Math Usually Breaks
Overtime is the single most common place employers miscalculate a tipped paycheck. When you work more than 40 hours in a week, your overtime rate is 1.5 times the full minimum wage, not 1.5 times $2.13. That means $7.25 × 1.5 = $10.88 per overtime hour.
The employer can still claim the $5.12 credit on those hours, so the minimum cash wage for each overtime hour is $10.88 − $5.12 = $5.76. That’s meaningfully higher than the $2.13 you get on regular hours. Payroll systems set up to pay a flat $2.13 across all hours, including overtime, are shorting the worker every time.3U.S. Department of Labor. Tip Regulations Under the Fair Labor Standards Act (FLSA)
If your schedule regularly pushes past 40 hours, look at the cash rate on your overtime hours specifically. It should rise. If it doesn’t, that’s a wage violation.
Deductions the Offset Makes Illegal
When your employer is taking a tip credit, they cannot deduct anything from your wages for cash register shortages, breakage, uniform costs, or customer walkouts. The reason is mechanical: you’re already at the $2.13 legal floor for cash wages, so any deduction pushes you below minimum wage.1U.S. Department of Labor. Fact Sheet 15 – Tipped Employees Under the Fair Labor Standards Act (FLSA)
Walkouts get particular attention because managers commonly try to charge them to the server. If your paystub shows a walkout deduction and your cash wage is $2.13, that deduction is illegal on its face.
What Your Employer Had to Tell You First
Federal law conditions the entire tip credit on notice. Before your employer can apply an offset to your wages, they must inform you of five things:
- The direct cash wage they will pay you (at least $2.13 an hour).
- The amount of tips they’ll count toward minimum wage (no more than $5.12 an hour).
- That the credit can’t exceed the tips you actually earn in a given hour.
- That your tips are yours, subject only to a valid tip pool with employees who regularly receive tips.
- That the credit doesn’t apply at all unless they’ve told you these things.
The notice can be verbal or in writing. If it never happened, the employer loses the right to claim the credit and owes you the full minimum wage for every hour worked.1U.S. Department of Labor. Fact Sheet 15 – Tipped Employees Under the Fair Labor Standards Act (FLSA) The requirement lives in 29 U.S.C. § 203(m)(2)(A).4Office of the Law Revision Counsel. 29 USC 203 – Definitions
When the Offset Shouldn’t Apply the Way You’d Expect
A few situations pull hours or dollars out from under the tip credit, and knowing them helps you read a paystub honestly.
Service Charges Aren’t Tips
A mandatory service charge on a bill (say, an automatic 20 percent on parties of six) is not a tip. It’s business revenue. The employer can keep some or all of it, and whatever share is passed to you is taxed as regular wages, not tip income.5IRS. Tips Versus Service Charges – How to Report Service charges also cannot be used to satisfy the tip credit. If most of what customers pay you comes through mandatory service charges rather than voluntary tips, the employer may not be entitled to claim the offset at all.
Side Work and Non-Tipped Hours
If a shift mixes tipped work with unrelated non-tipped duties (a server also handling maintenance, for example), the tip credit cannot apply to the non-tipped hours.6eCFR. 29 CFR 531.56 – More Than $30 a Month in Tips Related side work like rolling silverware or restocking is treated differently: under the commonly cited 80/20 framework, once more than 20 percent of your weekly hours go to supporting tasks, the credit cannot apply to the excess. A separate rule bars the credit on any continuous block of non-tipped work longer than 30 minutes.
Tip Pools With Managers
You can be required to share tips through a valid tip pool with other regularly tipped employees (servers, bartenders, bussers, hosts). What you cannot be required to do is share tips with managers or supervisors. Someone counts as a manager for this purpose if they direct the work of at least two full-time employees, have real input on hiring and firing, and have a primary duty of managing the business or a department. Owners with a 20 percent or larger equity stake who are actively running the business fall under the same bar.7U.S. Department of Labor. Fact Sheet 15B – Managers and Supervisors Under the Fair Labor Standards Act (FLSA) and Tips A pool that quietly feeds the shift manager is not a valid pool.
Your State May Set a Higher Cash Wage
Federal rules are the floor. Seven states have eliminated the tip credit entirely: Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington. In those states, employers must pay the full state minimum wage in cash before any tips.8U.S. Department of Labor. Minimum Wages for Tipped Employees Many other states allow a tip credit but require a cash wage well above $2.13. When two rules apply, your employer must follow whichever gives you more pay. When you check the offset on your paystub, check it against your state’s required cash wage, not just the federal figure.
If the Numbers Don’t Add Up
If your tips didn’t fill the credit and no makeup wage appeared on the check, if your overtime hours are still paying $2.13, if deductions are showing up while you’re on a tipped wage, or if a manager is pulling from the tip pool, the employer is exposed to real liability. Under 29 U.S.C. § 216, an employer who improperly claims a tip credit or keeps employee tips owes the worker the full credit taken plus any tips retained, and an equal amount in liquidated damages on top. In practice, that doubles what you’re owed.9Office of the Law Revision Counsel. 29 USC 216 – Penalties
Complaints go to the Department of Labor’s Wage and Hour Division. The investigations are confidential, and it’s illegal for an employer to retaliate against a worker who raises a wage concern.