Minimum Wage for Tipped Employees: 2026 Guide
The federal tipped wage is $2.13 with a $5.12 tip credit. The notice you must give first, the seven states with no credit, and the new 2026 W-2 rules.
Minimum Wage for Tipped Employees
The $2.13 cash wage, the tip credit you have to earn before you can take it, and the five ways to lose it and owe the difference for two years
The federal cash wage for a tipped employee is $2.13 an hour. Almost every article on this subject leads with that number, and then gives you a table, and then stops.
Here is what they leave out, and it is the part that costs restaurant owners real money: the tip credit is not something you are entitled to. It is something you have to earn, in advance, by doing several specific things first. Miss any one of them and you do not get a warning or a fine. You lose the credit entirely, which means you owe the difference between $2.13 and the full minimum wage, in cash, for every hour that employee worked, going back as far as the violation ran.
Across eight servers over two years, a notice you never gave is not a paperwork problem. It is a number with a comma in it.
So this guide is the tipped minimum wage from the employer side: the credit and its conditions, the notice almost nobody gives, the five ways to lose it, the seven states where none of it applies, and the new W-2 reporting that became mandatory this year and that a lot of guides still describe as optional. I build FirstHR, which does not run your payroll. This is general information rather than legal advice, and tipped wage law is genuinely one of the areas where an hour with an employment lawyer is a good purchase.
The Tipped Minimum Wage
There are two numbers and the relationship between them is the whole subject.
The $2.13 has not changed since 1991. The $7.25 has not changed since 2009. Which means the gap between them, and the entire economics of tipped work, has been frozen for a generation while everything else moved.
How the Tip Credit Works
Mechanically it is simple. The trap is in what it means rather than in the arithmetic.
Per the Department of Labor's Fact Sheet 15, an employer must pay a tipped worker at least $2.13 per hour, and the maximum tip credit that can currently be claimed is $5.12 per hour, being the $7.25 minimum wage less the $2.13 direct wage.
Now the framing that changes how you should treat this. The tip credit is not a rate. It is a conditional permission, and the conditions are not suggestions. You are being allowed to let your customers pay part of a wage that you owe, and the law attaches strings to that arrangement precisely because it is unusual.
Who Counts as Tipped
The federal test is one line and it is a low bar: an employee who customarily and regularly receives more than $30 a month in tips.
Note what is not in that test. Job title is not in it. Calling somebody a server does not make them a tipped employee, and neither does putting them on the floor. The test is about what they actually receive.
The Notice You Must Give First
This is the most commonly missed requirement in the entire subject, and it is also the cheapest to satisfy, which makes the number of employers who fail it genuinely remarkable.
Before you may take a single cent of tip credit, you must inform the employee, in advance, of five specific things. Per 29 CFR 531.59, the employer must inform tipped employees of the provisions of the tip credit before it may be used.
The law does not require the notice to be in writing. Give it in writing anyway, and get it signed, because in a dispute about whether the notice was given, the party who cannot produce it loses. Collect it at onboarding along with the rest of the paperwork, and keep it in the personnel file where you can find it in three years.
When Tips Fall Short
The tip credit only works to the extent the tips actually arrive. When they do not, the obligation reverts to you.
If the cash wage plus tips does not reach the applicable minimum wage for the hours worked in a workweek, you owe the difference. In cash. That week.
How to Lose the Tip Credit
Five ways, and none of them require bad intent. They mostly require not knowing.
Understand the shape of the penalty, because it is not what employers expect. You are not fined. There is no schedule of penalties. You simply lose the right to have counted the tips, which means the wage you owed all along was $7.25 an hour and you paid $2.13, and the difference is now due.
The Seven States With No Tip Credit
Before you apply any of the above, check whether it applies to you at all.
And these seven are the extreme rather than the only exception. A large number of other states permit a tip credit but require a cash wage well above the federal $2.13, and many raise their rates every January while a few move mid-year. Which is why any dollar figure in an article about this topic, including every figure in this one, is a starting point and not an answer.
Tip Pooling
Tip pools are lawful, common, and they are where small restaurants most often destroy their own tip credit without realizing it.
| Who | Can they be in the pool? | The rule |
|---|---|---|
| Servers, bartenders, bussers, hosts | Yes | Employees who customarily and regularly receive tips can always be pooled together |
| Cooks, dishwashers, back of house | Only if you take NO tip credit | They may be pooled only where you pay the full minimum wage in cash and claim no credit at all |
| Managers and supervisors | Never | They may not keep tips from a pool under any circumstances, whether or not a credit is taken |
| The employer | Never | You may not retain employee tips for any purpose. This is an absolute bright line |
The manager row is the one that catches small operations, and it catches them for an understandable reason. In a fifteen-person restaurant the manager is frequently on the floor, taking tables, working as hard as anybody. It feels obviously fair that they should share in the tips from a shift they worked.
It does not matter what it feels like. The prohibition attaches to their status, not to what they were doing that evening. A supervisor who waits tables is still a supervisor, and pooled tips flowing to them is a violation that will cost you the credit for every tipped employee in the pool.
Side Work and the Rule That Died
If you have read about tipped wages before, you have probably encountered the 80/20 rule, and a great many guides still describe it as current law. It is not, and the true position is messier and worth getting right.
| What happened | Where that leaves you | |
|---|---|---|
| The 80/20/30 rule | Adopted by the DOL in December 2021. Limited non-tipped side work to 20 percent of the workweek or 30 continuous minutes | It is gone. The Fifth Circuit vacated it in 2024 and the DOL formally withdrew it in December of that year |
| The dual jobs regulation | The pre-2021 version was reinstated in its place | This survives, and it is the rule that governs now. It imposes NO time limits on related side work |
| What dual jobs actually says | The tip credit applies only to hours worked in the tipped occupation | A server who works separate shifts as a maintenance worker gets full minimum wage for those hours |
| The catch | Some courts outside the Fifth Circuit have continued applying the older 80/20 guidance anyway | The safe position depends on your jurisdiction, and this is genuinely unsettled |
Overtime for Tipped Staff
A short section about a mistake that is large, common, and entirely arithmetic.
The underlying overtime obligation is the ordinary FLSA one, and whether an employee is entitled to it at all is a separate question answered in exempt versus non-exempt. A tipped employee is essentially always nonexempt.
The New W-2 Rules
The most immediately actionable thing in this article, and the one where the older guides you may have read are now simply wrong.
The One Big Beautiful Bill Act created a federal income tax deduction for qualified tips, capped at $25,000, for tax years 2025 through 2028. The IRS and Treasury published final regulations in April 2026. Per the IRS, workers in qualifying tipped occupations may deduct qualified tips.
That is the employee's benefit. Here is your obligation, which is new, and which is no longer optional.
Note the shape of this. The employee gets a tax break; you get a reporting obligation. The work landed on your side of the table, and it landed on the part of your system least likely to be able to handle it, which is the till.
A Service Charge Is Not a Tip
This distinction always mattered and now it has money attached to it, which means it will be noticed.
| A voluntary tip | A mandatory service charge | |
|---|---|---|
| Who decides the amount | The customer, freely | You. It is added automatically |
| Whose money is it | The employee's | Yours. It is revenue |
| If you give it to staff | It was already theirs | It is paid to them as wages, not as tips |
| Can it count toward the tip credit | Yes | No. It is not a tip |
| Does it qualify for the new deduction | Yes | No. Only voluntary tips qualify |
So the automatic eighteen percent you add to parties of six is not a tip. It is revenue, and when you pass it to the server it is wages, which also means it enters the regular rate for overtime purposes in a way that a tip does not.
And under the new rules, a till that reports it as a qualified tip is producing a wrong number that flows onto a W-2 and into somebody's tax return. The full set of what you file is in payroll forms.
The Compliance Checklist
Everything above, as things to actually verify.
Common Mistakes
The pattern is that almost none of these are failures of intent. The employer paying $2.13 with no notice is not trying to cheat anybody; they did not know a notice existed. The manager taking a share of the pool is doing so because they worked the shift.
But the tip credit does not care about intent, and that is the thing to carry away from this. It is a conditional permission with procedural requirements, and procedural requirements are satisfied or they are not. Which makes this one of the few areas of employment law where the entire outcome can turn on whether you can produce a single piece of paper, and where five minutes of work at hire is worth more than any amount of good faith afterwards. The wider framework is in the Fair Labor Standards Act.
Frequently Asked Questions
What is the minimum wage for tipped employees?
Under federal law, an employer must pay a tipped employee a direct cash wage of at least $2.13 per hour, and may claim a tip credit of up to $5.12 per hour against the $7.25 federal minimum wage. The employee must still end up with at least $7.25 per hour once tips are added; if they do not, you pay the difference. But that is only the federal floor. Many states require a higher cash wage, and seven states prohibit the tip credit entirely and require the full state minimum wage in cash before any tips.
What is the tipped minimum wage in 2026?
The federal cash wage for tipped employees is $2.13 an hour and has not changed since 1991. The federal minimum wage is $7.25 and has not changed since 2009. The maximum federal tip credit is therefore $5.12. Those federal figures are stable, but your state figures almost certainly are not: many states raise their rates every January, and several raise them mid-year. Any article, including this one, is a starting point rather than an authority on your state, and the Department of Labor maintains a current table you should check.
What is the minimum wage for servers?
The same rules apply to servers, waiters, waitresses, bartenders, and any other tipped employee: a federal cash wage of $2.13 with a tip credit of up to $5.12, so long as tips bring them to at least $7.25 an hour. The occupation does not change the analysis. What changes it is the state you are in, because the state may require a higher cash wage or may prohibit the tip credit altogether, and it is state law rather than job title that determines what you actually have to pay.
What is a tip credit?
A tip credit is the amount of an employee's tips that an employer is permitted to count toward its minimum wage obligation. Federally it is up to $5.12 an hour. The important framing for an employer is that it is not a discount you are entitled to; it is a permission that comes with conditions attached. You must give the employee advance notice, you must not keep any of their tips, and you must make up any shortfall. Fail any of those and the credit is lost, meaning you owe the full minimum wage in cash for every hour worked.
Who counts as a tipped employee?
Under the FLSA, a tipped employee is one who customarily and regularly receives more than $30 a month in tips. That is the federal test and it is a low bar. Some states use a lower threshold and add their own conditions, so a worker who is not a tipped employee under state law may still be one federally, and the stricter rule is the one that binds you. What does not determine the answer is the job title. Calling somebody a server does not make them a tipped employee, and the $30 test is about what they actually receive.
Do I have to tell employees before taking a tip credit?
Yes, and this is the single most commonly missed requirement in the whole area. Before you may take any tip credit at all, you must inform the employee in advance of specific things: the cash wage you are paying, the amount of credit you are claiming, that the credit cannot exceed the tips they actually receive, that all tips received are theirs to keep except through a valid tip pool, and that the credit does not apply unless they have been informed of these provisions. No notice, no credit, and the fact that they earned plenty in tips is not a defense.
What happens if an employee's tips do not reach minimum wage?
You pay the difference, in cash, and it is not optional. The tip credit only works to the extent the tips actually materialize. If a server's $2.13 cash wage plus their tips for the workweek does not reach the federal minimum for the hours they worked, you owe them the shortfall. This is a per-workweek calculation done individually, which means a good week does not offset a bad one and you cannot average across a month. A slow Tuesday shift is your problem rather than theirs.
Which states do not allow a tip credit?
Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington. In those seven states, an employer must pay the full state minimum wage as a cash wage, and tips are entirely on top of that and belong to the employee. If you operate in any of them, the tip credit does not exist for you and most of the mechanics in this article are simply irrelevant. Many other states, while allowing a credit, require a cash wage well above the federal $2.13, so the seven are the extreme rather than the only exception.
Can managers be in a tip pool?
No, and this is one of the fastest ways to destroy your tip credit and invite a claim. Managers and supervisors may not keep tips from a tip pool under any circumstances, whether or not you take a tip credit. This trips up small restaurants constantly, because in a small operation the manager frequently also waits tables, and the instinct is that a shift they worked on the floor should earn them a share. It does not. The rule is about their status, not about what they were doing that evening.
Can cooks and dishwashers be in a tip pool?
Only if you take no tip credit at all. Back-of-house employees such as cooks and dishwashers may participate in a tip pool only where the employer pays the full minimum wage as a cash wage and claims no tip credit. If you are paying $2.13 and claiming a credit, your tip pool may include only employees who customarily and regularly receive tips. Doing both at once, meaning claiming a credit while pooling tips with the kitchen, is a violation and it forfeits the credit.
Can the employer keep any of the tips?
Never. An employer may not keep employee tips for any purpose, regardless of whether it takes a tip credit. Not to cover credit card processing fees in states that prohibit it, not to cover walkouts, not to cover breakage, and not to redistribute to management. Tips belong to the employee who received them, subject only to a valid tip pool among eligible employees. This is one of the clearest bright lines in the entire subject and the penalties for crossing it are severe.
What is the 80/20 rule and does it still apply?
It applied and then it did not, and the current position is genuinely unsettled. The Department of Labor's 80/20/30 rule, which limited how much non-tipped side work a tipped employee could do while still being paid the tipped wage, was vacated by the Fifth Circuit in 2024 and the DOL formally withdrew it in December of that year. The pre-2021 dual jobs regulation was reinstated in its place, and it imposes no time limits. But courts outside the Fifth Circuit have in some cases continued applying the older 80/20 guidance, which means the safe assumption depends heavily on where you are.
What is the dual jobs rule?
It survives, and it is the rule that actually matters now. If an employee genuinely works two different jobs for you, such as a server who also works separate shifts as a maintenance worker, the tip credit is available only for the hours worked in the tipped occupation. The full minimum wage is due in cash for the hours in the non-tipped job. Note the distinction the courts drew: this is about performing tasks unrelated to the tipped occupation, not about how much time is spent on related side work like setting tables or rolling silverware.
How do I calculate overtime for a tipped employee?
On the full minimum wage, not on the cash wage, and getting this backwards is a classic and expensive error. Overtime is calculated at one and a half times the employee's regular rate, and the regular rate is based on the full applicable minimum wage rather than on the $2.13 cash wage. You then apply the tip credit against that figure. Employers who calculate overtime as one and a half times $2.13 have underpaid substantially, and the mistake compounds across every overtime hour every week.
What are the new W-2 rules for tips in 2026?
They are mandatory and they are new, and this is the thing most likely to catch you out this year. Under the tip deduction created by the One Big Beautiful Bill Act, employers must now separately report qualified tips on the Form W-2, in Box 12 with the code TP, along with the employee's Treasury Tipped Occupation Code in the new Box 14b. The IRS provided penalty relief for the 2025 tax year while systems caught up. That relief has ended: reporting for amounts earned in 2026 is required.
Does the No Tax on Tips deduction mean I stop withholding on tips?
No, and this is the misunderstanding that will cost you. The deduction is an income tax deduction claimed by the employee on their own return. Tips remain fully subject to Social Security and Medicare, and you must continue to withhold the employee's FICA share and pay your matching share exactly as before. Nothing about your withholding changes. What changes is your reporting obligation, and the practical effect for you is more work rather than less.
Is a service charge a tip?
No, and the distinction now has money attached to it. A mandatory service charge, such as an automatic gratuity added to large parties, is not a tip. It is a service charge, it belongs to the employer, and if you distribute it to staff it is paid to them as wages rather than as tips. Under the new deduction rules, only voluntary tips qualify, which means a point of sale system that lumps service charges together with voluntary tips will cost your employees their deduction and will cause you to file an incorrect information return.
What records do I need to keep for tipped employees?
More than for other employees, and the burden is on you. You need to keep records of tips reported by the employee, the amount of tip credit you claimed per hour, the hours worked in tipped and non-tipped occupations separately where relevant, and the notice you gave before claiming the credit. That last one is the one nobody keeps and the one that decides the case, because in a dispute about whether you gave the required notice, the party who cannot produce it is the party who loses.
Can I pay a tipped employee a salary?
Be very careful. A tipped employee is almost always nonexempt, which means they are entitled to the minimum wage for every hour worked and to overtime past forty hours in a workweek. Paying a flat salary does not change either of those obligations; it simply makes it harder for you to demonstrate that you met them. The classification question is separate from the tipped question, and calling somebody salaried does not exempt them from anything. That test is about their duties and their pay level.
What is the penalty for getting the tip credit wrong?
You lose the credit, which means you owe the difference between the cash wage you paid and the full minimum wage, for every hour that employee worked during the period the violation ran. Not a fixed fine: the actual money. Depending on the circumstances there may also be liquidated damages equal to the back wages, and attorney fees. Because tip credit practices are applied uniformly across a staff rather than to one person, a single defect such as a missing notice typically affects every tipped employee you have and every hour they worked.