Calculate the tip credit amount by subtracting the tipped minimum wage from the standard minimum wage to understand employer wage obligations.
A tip credit allows employers to pay tipped employees a lower direct wage, with tips making up the difference to reach the full minimum wage. Under the Fair Labor Standards Act (FLSA), the federal tipped minimum wage is $2.13 per hour, with a maximum tip credit of $5.12 per hour against the $7.25 federal minimum wage. However, most states have their own tipped minimum wages and tip credit amounts.
The tip credit means the employer is counting on the employee's tips to bridge the gap between the tipped minimum wage and the standard minimum wage. If an employee's tips don't bring their effective hourly rate up to the standard minimum wage, the employer must make up the difference.
This calculator helps employers and employees understand the exact tip credit amount by subtracting the tipped minimum wage from the standard minimum wage. It's essential for payroll compliance, labor budgeting, and ensuring tipped workers always receive at least the full minimum wage when direct wages and tips are combined.
Understanding the tip credit is critical for both employers and employees. Employers need it for accurate payroll budgeting and FLSA compliance. Employees should know their guaranteed minimum and when their employer must supplement their tips. This calculator makes the math simple and transparent. Instant results let you test multiple scenarios so you can align pricing, staffing, and inventory decisions with current demand and cost pressures.
Tip Credit = Standard Minimum Wage − Tipped Minimum Wage
Result: $5.12 tip credit per hour
With the federal standard minimum wage of $7.25 and the tipped minimum wage of $2.13, the tip credit is $7.25 − $2.13 = $5.12 per hour. The employer can claim up to $5.12 per hour in tip credit, provided the employee's tips bring their total hourly compensation to at least $7.25.
The tip credit system allows hospitality employers to share the cost of minimum wage compliance with the tips that employees earn. The employer pays the tipped minimum wage directly, and tips earned by the employee cover the remaining amount up to the full minimum wage. If tips fall short, the employer must bridge the gap.
State tip credit laws vary dramatically. Some states mirror the federal structure with slightly higher tipped minimums. Others have eliminated the tip credit entirely, requiring full minimum wage before tips. Employers operating in multiple states must track each jurisdiction's rules separately to ensure compliance.
Maintain daily tip records by employee, calculate weekly totals against the minimum wage threshold, and automate makeup pay calculations in your payroll system. Proactive tracking prevents costly wage-theft claims and Department of Labor investigations that can result in back pay, penalties, and reputational damage.
A tip credit allows employers to pay tipped employees a lower direct wage (e.g., $2.13/hr federally) and count the employee's tips toward satisfying the full minimum wage obligation ($7.25/hr federally). The credit amount is the difference between the two rates.
If a tipped employee's direct wages plus tips do not equal the standard minimum wage for a workweek, the employer must pay the difference. This is called a "makeup" or "shortfall" payment and is a legal obligation under the FLSA.
No. Seven states (Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington) require employers to pay the full state minimum wage before tips. Other states have varying tipped minimum wages higher than the federal $2.13.
For overtime calculations, tipped employees must be paid 1.5 times the full minimum wage, not the tipped minimum wage. The tip credit can still apply, but the overtime rate base is the standard minimum wage.
No. Under FLSA, the employer must inform employees about the tip credit provisions before taking the credit. This includes explaining the tipped minimum wage, the tip credit amount, and the employee's right to retain all tips.
The FLSA requires tip credit compliance on a workweek basis. Even if an employee's tips fall short on one day, the employer only must make up the difference if the workweek average falls below the standard minimum wage.