Tip Credit Explained: What Tipped Workers Need to Know

If you have ever looked at a paycheck that says $2.13 an hour and wondered how that is even legal, you have run into the tip credit. It is one of the most confusing parts of getting paid as a tipped worker, and it is also one of the easiest places for an employer to get the math wrong.

Most articles about the tip credit are written for employers and payroll teams. This one is written for you. Here is what the tip credit actually does to your paycheck, how to tell if you are being paid correctly, and what to do if you are not.

What Is a Tip Credit? (In Plain English)

A tip credit is the amount of your tips that an employer is allowed to count toward minimum wage. That is the whole idea in one sentence.

Federal law sets a minimum wage of $7.25 an hour. Normally an employer has to pay that in cash. But for tipped workers, the law lets the employer pay a lower cash wage and treat your tips as filling the gap. The “credit” is that gap.

One myth is worth clearing up right away. The tip credit does not mean your employer is taking your tips. Your tips are still yours. The tip credit is just an accounting figure in the minimum-wage calculation, a way of saying “your tips already got you to minimum wage, so we do not owe you more cash.”

That distinction matters. An employer can count your tips toward the wage math, but it cannot pocket them. Tips belong to employees. Managers and supervisors cannot keep employee tips or take a share of a tip pool.

The Numbers: Federal Cash Wage, Tip Credit, and Minimum Wage

The federal math is simple once you see it laid out.

Federal tipped cash wage: $2.13 per hour
Maximum federal tip credit: $5.12 per hour
Federal minimum wage: $7.25 per hour

Add the $2.13 cash wage and the $5.12 tip credit and you get $7.25. The tip credit is just the difference between the low cash wage and the full minimum wage.

A few conditions have to be met before an employer can use the tip credit at all. You only count as a “tipped employee” under federal law if you customarily and regularly receive more than $30 a month in tips. If you make less than that, you are owed the full minimum wage in cash.

The employer also has to tell you in advance. Before it can pay the lower cash wage, it must inform you that it is taking a tip credit, the amount of the credit, and that all your tips are yours except for a valid tip pool. If your employer never told you any of that, it may not be entitled to the credit at all.

One quick note to avoid confusion. The “tip credit” in this article is a wage law under the Fair Labor Standards Act. It is not the same as the IRS FICA tip credit, which is a tax credit for employers, and it is not the same as the 2026 no-tax-on-tips deduction for workers. Three different things that happen to share the word “tip.”

The Make-Up Pay Rule: Your Most Important Protection

This is the section to remember. The make-up pay rule is the protection that keeps the tip credit honest.

The rule: if your cash wage plus your tips do not add up to at least the full minimum wage for every hour you worked in a workweek, your employer must pay you the difference in cash.

Say you work a slow week. The federal cash wage of $2.13 plus your actual tips comes out to $6.40 an hour. The full minimum wage is $7.25. Your employer owes you the missing $0.85 for every hour that week. The tip credit can never be larger than the tips you actually earned.

The key word is workweek. This is checked one week at a time. An employer cannot average a great Saturday-night week against a dead Monday-lunch week to make the numbers work. Every single workweek has to stand on its own.

If you regularly have shifts where tips are thin and you never see make-up pay land on your check, that is a red flag worth looking into.

Tip Credit by State: Where It’s Smaller or Banned

The federal $2.13 is a floor, not the rule everywhere. Your state can be very different.

Seven states ban the tip credit entirely in 2026: Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington. These are sometimes called “One Fair Wage” states. In those states, employers must pay the full state minimum wage in cash before you earn a single tip. Your tips are pure extra.

Many other states allow a tip credit but set a cash wage higher than $2.13. Some land at $5 or $7 an hour or more, with a smaller tip credit on top. A handful follow the federal $2.13 exactly.

State minimum wages also change often, usually every January. Because of that, it is not worth printing a full table here that will be stale within a year. Instead, look up your own state’s current tipped minimum wage on your state labor department website. That number, not the federal one, is what your employer actually has to hit.

Overtime, the Dual Jobs Rule, and Common Employer Mistakes

Two parts of the tip credit trip up employers constantly. Both can quietly cost you money.

Overtime. When you work more than 40 hours in a week, overtime has to be calculated on the full minimum wage, not the $2.13 cash wage. The correct method: take the full minimum wage, multiply by 1.5, then subtract the tip credit. That gives your overtime cash rate.

A common illegal shortcut is to multiply the $2.13 cash wage by 1.5 and call that overtime. That produces a number far below what the law requires. If your overtime line looks suspiciously close to $3.20 an hour, ask questions.

The dual jobs rule. Many tipped workers also do non-tipped side work: rolling silverware, deep-cleaning, restocking, prepping the bar before open. If you spend substantial time on duties that do not generate tips, an employer may not be allowed to take the tip credit for those hours and may owe you the full minimum wage for them.

Red flags of underpayment to watch for:

Your cash wage plus tips dips below minimum wage and no make-up pay appears
Overtime is paid off the $2.13 cash wage instead of the full minimum wage
A manager or supervisor takes a cut of the tip pool
You were never told the employer is taking a tip credit
Hours of non-tipped cleaning or prep are paid at the tipped rate

How to Check If You’re Being Paid Correctly (and What to Do)

You can only catch underpayment if you have records. Here is a simple self-audit you can run every workweek.

Track four things for each week:

Total hours worked
Cash tips received
Card tips received
Tip-outs paid to other staff

Then do the math. Add your cash wages to your net tips (tips minus tip-outs). Divide that total by your hours worked. The result is your effective hourly rate. Compare it to the full minimum wage in your state. If you come up short and there was no make-up pay, you may be owed money.

Doing this from memory does not work. The numbers blur within a day or two. Logging tips shift by shift is the only way to have a record that holds up. A tip-tracking app like Server44 keeps cash tips, card tips, hours, and tip-outs separated by workweek, which is exactly the breakdown the make-up pay rule is checked against. You can download it here and start logging this week. Our tools page also has free calculators for tip-outs and take-home pay if you want to run a quick estimate first.

If the numbers come up short:

Start with your employer or payroll. Some shortfalls are genuine payroll errors and get fixed once flagged.
If that does not resolve it, contact your state labor department or the U.S. Department of Labor Wage and Hour Division. They investigate wage claims and can pursue back pay.
Bring your records. Your own week-by-week log of hours and tips is the evidence that makes a claim credible.

For more on the 2026 tax side of tips, see our other blog posts on the no-tax-on-tips deduction and what you actually take home.

A reminder: this article is educational only. It is not legal or tax advice. Wage laws vary by state and change often, so check with your state labor department or an attorney about your specific situation.

Frequently Asked Questions

What is a tip credit in simple terms?

A tip credit is the amount of your tips an employer is legally allowed to count toward meeting minimum wage. It lets an employer pay a lower cash wage (as low as $2.13 an hour federally) and treat your tips as covering the gap up to the full minimum wage. The employer is not taking your tips. It is an accounting figure used in the minimum-wage math.

What is the federal tipped minimum wage in 2026?

The federal cash wage for tipped employees is $2.13 an hour. The maximum federal tip credit is $5.12 an hour. Added together they equal the $7.25 federal minimum wage. Many states require a higher cash wage than $2.13, and seven states require the full minimum wage in cash before tips.

Can my employer pay me less than minimum wage if I get tips?

An employer can pay a cash wage below the full minimum wage only if your tips make up the difference and several conditions are met. You must customarily receive more than $30 a month in tips, the employer must tell you in advance that it is taking a tip credit, and you must keep all your tips except for a valid tip pool. If those conditions are not met, you are owed the full minimum wage in cash.

What happens if my tips don’t bring me up to minimum wage?

Your employer must make up the difference. Under the federal make-up pay rule, if your cash wage plus tips do not equal at least the full minimum wage for every hour in a workweek, the employer must pay you the shortfall in cash. This is checked per workweek, so a slow week cannot be averaged against a busy one.

Which states don’t allow a tip credit?

Seven states ban the tip credit entirely in 2026: Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington. In those states, employers must pay the full state minimum wage in cash before any tips. Many other states allow a tip credit but set a cash wage higher than the federal $2.13.

How is overtime calculated for tipped employees?

Overtime for a tipped employee must be based on the full minimum wage, not the $2.13 cash wage. The employer takes the full minimum wage, multiplies it by 1.5, and then subtracts the tip credit to find your overtime cash rate. Calculating overtime off the $2.13 cash wage is a common and illegal mistake that underpays workers.

How do I know if my employer is paying me correctly?

Track your hours, cash tips, card tips, and tip-outs for each workweek. Add your cash wage to your tips, divide by hours worked, and check that the result is at least the full minimum wage for your state. If it falls short and the employer did not make up the difference, you may be underpaid.

What should I do if I think I’ve been underpaid?

Start by raising it with your employer or payroll, since some shortfalls are honest payroll errors. If that does not resolve it, contact your state labor department or the U.S. Department of Labor Wage and Hour Division, which can investigate wage claims. Bring your own records of hours and tips. This article is educational only and not legal advice.

References

Frequently Asked Questions

What is a tip credit in simple terms?

What is the federal tipped minimum wage in 2026?

Can my employer pay me less than minimum wage if I get tips?

What happens if my tips don't bring me up to minimum wage?

Which states don't allow a tip credit?

How is overtime calculated for tipped employees?

How do I know if my employer is paying me correctly?

What should I do if I think I've been underpaid?