Minimum Wage for Tipped Employees by State in 2025

If you operate a restaurant, hotel, or other business that employs tipped workers, then calculating wages and wage-based taxes can present some extra challenges. Employers need to understand how minimum wage requirements, reporting, and overtime calculations work for tipped workers, and how state-by-state variations can add complexity for employers operating in multiple regions.

Here's some things you should know about minimum wage for tipped employees to help you keep compliance with applicable employment laws and regulations in your state and across the country.

The Basics of Tipped Wages

From nail salon technicians to bartenders to delivery drivers, millions of American workers rely on tips as a sizable part of their take-home pay. Tipped wages make up a significant portion of compensation for workers in many service-based industries like restaurants, hotels, and other service-based businesses.

Depending on state law, payroll for restaurants and hospitality businesses often involves an employer paying their tipped employees a lower cash wage which is supplemented by customer tips. Together, base wages and tips must meet or exceed minimum hourly wage requirements.

What Are Tipped Wages?

The Internal Revenue Service (IRS) defines a tip as a discretionary payment given to an employee by a customer. Tips may include cash, electronic payments, and non-cash items of value. In industries where employees regularly receive customer tips, employers may be able to account for those tips as wages for purposes of meeting applicable minimum wage requirements.

Who Qualifies as a Tipped Employee?

While requirements vary by jurisdiction, a tipped employee receives more than a designated amount in tips per month ($30 under the Fair Labor Standards Act (FLSA)) as part of their regular job duties. Tipped employees typically include restaurant servers, bartenders, valets, bellhops, casino dealers, and other service providers.

How Do Tipped Wages Work?

Under a tipped employee wage structure, employers can pay a lower direct wage (often called a "cash wage") to tipped employees with the employee's tips counted towards meeting the required minimum wage. If the combination of direct wages and tips does not meet or exceed the minimum wage employers must make up the difference.

For example, the minimum cash wage for restaurant workers and other tipped employees in South Carolina is $2.13. When calculating payroll for tipped wages in this state, an employer may count up to $5.12 in tips to meet the minimum wage requirement. Together, cash and tips must equal an hourly rate of at least $7.25.

Employers doing business in multiple states may encounter some challenges of tipped wages, such as ensuring compliance with local minimums and varying requirements for tipped employees between jurisdictions. In these scenarios, be sure that you understand and follow the nuances of tipped wage requirements in each jurisdiction.

What Is a Tip Credit?

Tip credits allow employers to count part of an employee's tips toward the employer's minimum wage requirement.

The maximum tip credit an employer can claim is the difference between the required cash wage and the standard minimum wage. To help them prove their compliance with applicable legal requirements, employers should carefully track and monitor employee earnings. In addition, employers should:

• Inform employees of the tip credit system before implementing
• Maintain accurate records of tips received
• Ensure that tipped employees retain all tips they receive except in valid tip-pooling arrangements
• Conduct regular payroll reviews to verify that the combination of direct wages and tip credits meets or exceeds minimum wage requirements each pay period
• Make up the wage difference if an employee's tips fall short, causing their total hourly earnings to drop below minimum wage

What Is the Difference Between a Tipped Employee and Tipped Credit?

A tipped employee is an employee who receives a designated minimum amount in tips per month. A tip credit represents the portion of a tipped employee’s tips that are being applied to meet the applicable minimum wage.

Federal Minimum Wage for Tipped Employees

The standard federal minimum wage for tipped employees required by the Fair Labor Standards Act is $7.25 per hour. Under the FLSA, tipped employees can be paid a direct wage of $2.13 per hour in direct cash wage when this amount combined with their tips meets or exceeds the applicable minimum wage threshold.

Where only the FLSA applies, employers with tipped employees can claim a maximum tip credit of $5.12 per hour against their minimum wage obligations. However, if a server's tips combined with their base wage don't reach the $7.25 threshold, the employer must make up the difference to meet the tipped minimum wage requirement.

Many states and localities have set up more stringent guidelines, such as higher minimum wage requirements.

State-by-State Breakdown of Tipped Minimum Wage

Differences in state laws and regulations have created wide variations in tipped minimum wage requirements that often exceed federal standards.

For instance, some states require employers to pay tipped employees the full state minimum wage and prohibit them from considering the tips received by their employees. Others set their direct minimum cash wage rates for tipped employees at various levels between the federal minimum of $2.13 and their state-specific minimum wage.

Here's a breakdown of state-by-state minimum wage requirements for tipped employees.

States That Require Higher Minimum Wage for Tipped Workers

Beyond the federal baseline of $2.13 per hour, many states require a higher minimum wage for tipped employees. Some states may have additional laws that affect minimum wage standards, and some cities or regions within a particular state may set standards greater than their state law requires. Always refer to state and local laws to verify compliance.

Note: State minimum wage data changes periodically. The following chart is up-to-date and accurate as of March 4, 2025.

States That Mandate Full Minimum Wage for Tipped Workers

The following states mandate the full minimum wage for tipped employees. Because specifics may vary based on city, locality, or exceptional circumstances, always refer to state and local laws to help you ensure your compliance.

Note: State minimum wage data changes periodically. The following chart is up-to-date and accurate as of March 4, 2025.

States That Match Federal Minimum Wage for Tipped Workers

The following states match the federally mandated minimum wage for tipped employees. Specific laws and requirements may vary based on city, locality, or exceptional circumstances. Always refer to state and local laws to ensure compliance.

Note: State minimum wage data changes periodically. The following chart is up-to-date and accurate as of March 4, 2025.

Crucial Compliance Areas for Employers of Tipped Workers

Beyond ensuring tipped employees are paid at least the minimum wage for each hour worked through a combination of their direct cash wage and tips received, employers must also navigate other complex employment laws and regulations that impact areas like tip pooling arrangements, tip reporting, and overtime calculations. Failing to manage these issues properly can result in significant penalties, back wage payments, or potential legal action.

Tip Reporting

Accurate tip reporting is a shared responsibility between employers and employees. Each party must follow specific guidelines to ensure compliance with tax and wage laws. If they don't, both could face penalties.

Here's what employees and employers need to know.

Employees

Employees must report all tips received during the month by the 10th day of the following month. Employees should:

• Report all tipped income of $20 or more, including cash and credit card tips
• Report non-monetary tip values (such as meals, game tickets, etc.)
• Include their name, address, social security number, total tip amount, and the month the tips were collected

Employers

Employers must withhold appropriate income and payroll taxes based on reported amounts. Employers should:

• Maintain accurate records of reported tips
• Ensure proper tax withholding
• Report tips on employees' W-2 forms
• Collect and maintain signed tip declarations from employees
• Include reported tips when calculating overtime rates and other wage-based benefits
• Demonstrate that their tipped employees' total earnings meet or exceed the standard minimum wage for every pay period (if receiving the tip credit)
• File Form 8027 (Employer's Annual Information Return of Tip Income and Allocated Tips) if they operate large food or beverage establishments where tipping is customary

A systematic approach to tip reporting helps ensure tax compliance and protects employers and employees from potential audits or wage disputes.

Tip Pooling

Tip pooling is a widespread practice in the service industry. In a tip pool, all tips are combined and then redistributed among the tipped workers using a predetermined formula. For example, restaurant servers may receive a percentage of the tip pool based on how many hours they worked. This arrangement is intended to distribute tips equitably among all tipped workers.

Strict regulations govern which employees can take part in mandatory tip pools and how the pool must be structured. Federal guidelines cover:

• Who Can Participate: Only employees who regularly and customarily receive tips can be required to take part in a tip pool. This typically includes servers, bartenders, and bussers. Managers and supervisors may not be included in the tip pool.
• Non-Tipped Employees: In some cases, employers who pay the full minimum wage and don't take a tip credit may include non-tipped employees (such as cooks and dishwashers) in tip pooling arrangements.
• Transparent Records: Employers must keep detailed records of tip collection and distribution. This helps ensure transparency in how pooled tips are distributed among participating employees.
• Distribution Formulas: The distribution formula must be communicated to all employees in the tip pool. Employers must also prove that each employee receives a fair share of the pool.
• Administrative Fees: Employers cannot deduct any administrative fees or other costs from the tip pool. All distributed tips must go directly to eligible employees.

Employers of tipped employees should be mindful of any requirements related to tip pools in the states and/or localities in which they operate.

Overtime for Tipped Employees

Under the FLSA, if a covered employee works more than 40 hours in a workweek, they are entitled to receive one and one-half times their regular rate of pay for each overtime hour worked in the workweek.

However, the process can seem a little more complex for tipped workers. Here's how to calculate overtime for tipped employees:

1. Base the overtime amount on the tipped employee’s regular rate of pay, which must be equal to or greater than the full minimum wage, not the lower direct cash wage.
2. Apply the same tip credit to regular and overtime hours.
3. Account for all variable compensation when calculating overtime rates for tipped employees, including service charges and non-discretionary bonuses.
4. Always check federal, state, and local laws for additional requirements for tipped employees that could affect how you pay your employees’ overtime.

Let's look at an example:

The formula for calculating overtime for tipped employees is:

(Direct wage) + (tip credit) = (minimum wage)

Hours worked x minimum wage = (straight time wages due)

Total earnings / total hours worked = (regular rate)

(Regular rate) x Overtime hours x .5 = (overtime earnings)

If an employee usually earns $2.13 per hour plus a $5.12 tip credit, their overtime calculations must start with the entire $7.25 minimum wage.

The employer would then multiply $7.25 by the total hours worked to figure out the employee’s total straight-time earnings.

The straight-time earnings, plus any additional eligible compensation, are then divided by all hours worked to determine the regular rate of pay, which is then multiplied by .5 before being applied to the overtime hours worked to determine the overtime earnings owed.

How Payroll Software Simplifies Paying Tipped Employees

Managing payroll for tipped employees, especially for those in the hospitality industry, is a complex process that includes understanding federal guidelines, checking the laws in your states and localities, keeping detailed records, and ensuring correct calculations.

Payroll software helps reduce that burden by simplifying payroll administration, automating payroll tax calculation and payment, and helping you stay current with employment laws and regulations for tipped workers.