Should I use a tip credit or pay full minimum wage?
How tip credit works
Under federal law, employers can pay tipped employees a cash wage as low as $2.13 per hour if tips make up the difference to reach the full federal minimum wage of $7.25. This is the tip credit. However, many states have higher minimum wages and some do not allow tip credit at all.
If an employee's tips plus cash wage don't equal the full minimum wage, you must make up the difference. You also must meet notice and recordkeeping requirements. Failing to do so can lead to back pay and penalties.
- Check your state's tip credit rules; they vary widely.
- Some states require full minimum wage before tips.
- Tip credit requires accurate tip reporting and payroll records.
- You must make up any shortfall to full minimum wage.
Pros and cons of each approach
Tip credit lowers your direct payroll costs, which can help in tight-margin operations. But it adds administrative work and legal risk, and some workers prefer a stable, higher base wage. In competitive labor markets, paying full minimum wage can help you attract and keep better staff.
Paying full minimum wage can simplify payroll and reduce compliance headaches. It may also reduce turnover, which saves money in the long run. However, it increases your hourly labor cost, so you may need to adjust prices or scheduling.
Common mistakes
- Assuming federal tip credit rules apply in all states; many have stricter laws.
- Failing to make up the difference when tips don't reach minimum wage.
- Not keeping proper records of tips and hours, which can trigger audits and fines.
