What is a tip credit?
Updated July 2026
A tip credit is the rule that lets your employer pay you less than the minimum wage in cash, on the theory that your tips make up the rest. It is the single reason a paycheck can say $2.13 an hour, and it quietly decides several other things about your job — including who is legally allowed a share of your tips.
How it is supposed to work
Under federal law the arithmetic is fixed:
- The employer pays a cash wage of at least $2.13 an hour.
- It claims up to $5.12 an hour of your tips as a "credit" toward its wage obligation.
- Those two must reach the $7.25 federal minimum wage. Together, they do exactly.
States are free to be stricter, and most are. Many set a tipped cash wage well above $2.13; some set it at the full minimum wage, which is the same as banning the credit. Your state's actual figure is on its pay by state page.
The part that gets skipped: the make-up requirement
The credit is only valid to the extent your tips actually earn it. If a slow week leaves your cash wage plus tips below the applicable minimum wage for the hours you worked, your employer owes you the difference in cash. That is not a courtesy, it is the condition on taking the credit at all.
It is also the requirement workers are least equipped to check, because checking it needs two numbers most people do not keep: hours worked and tips actually received, shift by shift. A tip log is what turns "I think that week was short" into a number you can point at.
Conditions on taking the credit
An employer generally has to tell you it is taking a tip credit before it takes one, and you have to keep all your tips except for a valid tip pool. Rules about how much non-tipped side work a tipped employee can do while on the tipped wage have been rewritten and litigated repeatedly in recent years, so treat any specific "80/20" figure you read as something to verify against current Department of Labor guidance and your state's own rules rather than a settled number.
States that do not allow a tip credit
In these states, tipped staff must be paid the full state minimum wage before tips:
- Alaska — $11.91/hour cash wage, tips on top.
- California — $16.50/hour cash wage, tips on top.
- Minnesota — $11.13/hour cash wage, tips on top.
- Montana — $10.55/hour cash wage, tips on top.
- Nevada — $12.00/hour cash wage, tips on top.
- Oregon — $14.70/hour cash wage, tips on top.
- Washington — $16.66/hour cash wage, tips on top.
Everywhere else, some form of tip credit is permitted, though the cash wage floor varies a great deal — compare them on the pay by state index.
Why it decides your tip pool
The tip credit is the hinge for back-of-house inclusion. When an employer takes a tip credit, cooks and dishwashers cannot be in a mandatory tip pool. When the employer pays the full minimum wage and takes no credit, federal law allows a broader pool that can include them. Either way, managers, supervisors, and owners cannot keep tips from the pool. See tip pooling laws by state for what that means where you work.
What it means for your real hourly
In a $2.13 state, your wage is a rounding error and your income is essentially all tips — so your true hourly swings entirely with the room, and almost nothing is withheld for taxes as you go. In a no-credit state, you have a real floor under a bad night, and tips are genuine upside. Same job, different risk profile. The true hourly calculator shows which one you are actually living in, and the set-aside guide covers the tax half.
General information, not legal advice. Wage rules change and vary by state and city — confirm current figures with your state labor department.
Common questions
What is a tip credit?
A tip credit lets an employer count part of your tips toward its minimum wage obligation, so it can pay you a lower cash wage. Federally, the cash wage can be as low as $2.13 an hour and the employer may claim up to $5.12 an hour of your tips as credit, which together must reach the $7.25 federal minimum. Many states set a higher cash wage, and some ban the practice outright.
What happens if my tips do not reach the minimum wage?
Your employer has to make up the difference. The tip credit is only valid to the extent your tips actually cover it — if a slow week leaves your cash wage plus tips short of the applicable minimum wage for the hours you worked, the employer owes you the shortfall in cash.
Which states do not allow a tip credit?
Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington require employers to pay tipped staff the full state minimum wage before tips. Several other states allow a tip credit but cap it well below the federal maximum, so the cash wage is much higher than $2.13.
How does the tip credit change tip pooling?
It is the deciding factor for back-of-house. When an employer takes a tip credit, cooks and dishwashers cannot be included in a mandatory tip pool. When the employer pays the full minimum wage and takes no credit, federal law permits a broader pool that includes back-of-house staff. Managers, supervisors, and owners can never keep tips from the pool either way.
Does the tip credit affect the taxes I owe?
No. The tip credit is a wage-and-hour rule about what your employer must pay you, not a tax rule. Your tips are taxable income either way. What the credit does change is how little is left in your paycheck to withhold from, which is why cash-heavy tipped workers in $2.13 states often owe at filing.
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