Tip Credit

A tip credit lets employers pay tipped employees a lower direct wage by counting part of their tips toward the minimum wage. This helps businesses reduce payroll costs.

How does tip credit work in determining an employee's minimum wage?

The Fair Labor Standards Act (FLSA) permits employers to pay tipped employees a reduced base wage, provided that their tips bring total earnings to at least the full minimum wage. For instance, in Tennessee, employers may pay tipped employees a base wage of $2.13 per hour, provided the employee’s total earnings, including tips, equal at least the federal minimum wage of $7.25 per hour. If an employee’s tips fall short, the employer is responsible for making up the difference. To comply with wage laws and avoid penalties, employers must track each employee’s tips every pay period.

What are the requirements for an employer to use the tip credit?

Employers are required to notify tipped employees about the tip credit, verify that they consistently receive tips, and ensure employees keep all their tips unless they're part of a lawful tip-pooling arrangement. Tips may not be used to cover business expenses or be shared with managers.

What is the maximum tip credit allowed under federal law?

Under federal law, the tip credit is the amount an employer can count from an employee’s tips toward meeting minimum wage requirements. While federal regulations set a maximum tip credit, individual states may set different limits.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.