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Insurance offered through OnPay Insurance Agency, LLC (CA License #0L29422)
Updated: January 13, 2023
Tips can comprise up to 58% of an employee’s salary in a service-based business. And just like any other income, tips are subject to taxes and must be taken into account when running payroll.
Although there are a few extra steps to follow, making sure tips are accounted for can be a relatively simple process when you have a system in place.
Let’s take a deeper dive into tipped wages, tip credits, and everything you need to know to ensure this type of income is being handled correctly.
First things first: The U.S. Department of Labor defines a tipped employee as anyone who receives $30 or more in tips each month. However, a little research can go a long way since dollar amounts can vary state-by-state depending on the rules each state sets.
It’s easy to get tips and service charges mixed up, so it’s important to understand the difference between the two. A tip is a voluntary payment made to somebody for service, while a service charge or automatic gratuity is a predetermined amount you know before the bill arrives.
A payment is considered a tip if the:
A service charge is an additional fee related to buying a service or product. Examples of this vary by industry and include:
According to the Fair Labor Standards Act (FLSA), all covered non-exempt workers are entitled to a minimum wage of $7.25 per hour, and $2.13 for tipped employees (assuming the difference, $5.12, is made up in tips). However, minimum wages vary widely from state-to-state, as do tipped minimum wages.
Some states, such as California, prohibit employers from paying tipped employees a lower minimum wage than non-tipped employees. And other states, like New York, opt for a higher tipped minimum wage than the federal one of $2.13 per hour.
No matter where your business is located, there is one common requirement: All tipped employees must be paid at least the state minimum wage. For example, if the tipped minimum wage is set at the federal amount of $2.13 and your employee does not make enough in an hour from tips to reach the $7.25 threshold, you (as the employer) are responsible for making up the difference.
Tip credits are another important payment approach to understand. Tip credits allow businesses to pay tipped employees a lower minimum wage than the one established by the state because you’re taking tips into account to meet the wage requirements.
In other words, if your employee makes enough in an hour (when including tips) to reach the state’s minimum wage threshold, the FLSA allows the employer to take a tip credit of the difference between the tipped and overall minimum wage.
Explained another way — this practice does not involve deducting anything from an employee’s pay, but rather is an acknowledgment that tips are being earned by the employee and as an employer you’re claiming a certain amount of that income toward the employee’s minimum wage.
Before taking a tip credit however, there is certain information you must provide to employees. This includes:
As you continue scrolling you’ll see tip credit information organized in a table below.
While there’s only one federal minimum wage rate, these rates vary between state, city, and county, and are often adjusted to align with the cost of living. You can always use our state-by-state resource but we’ve also put together a chart to help you keep up to date with minimum wage rates — and tipped rates — in all 50 states, including your city or locality. Also, if you are interested in previous
The chart below was last updated: 01/07/2023
|State||2023 tipped minimum wage (total)||2023 minimum wage rate||2023 tip credit|
|California – Small Employer (25 or Fewer)||$15.50||Prohibited||Prohibited|
|California – Large Employer (26 or More)||$15.50||Prohibited||Prohibited|
|Fremont (small employer 25 or fewer)||$16.00||Prohibited||Prohibited|
|Fremont (large employer 26 or more)||$16.00||Prohibited||Prohibited|
|Los Angeles (small employer 25 or fewer)||$16.04||Prohibited||Prohibited|
|Los Angeles (large employer 26 or more)||$16.04||Prohibited||Prohibited|
|Los Angeles County (small employer 25 or fewer)||$15.96||Prohibited||Prohibited|
|Los Angeles County (large employer 26 or more)||$15.96||Prohibited||Prohibited|
|Malibu (small employer 25 or fewer)||$15.96||Prohibited||Prohibited|
|Malibu (large employer 26 or more)||$15.96||Prohibited||Prohibited|
|Novato (small employer 25 or fewer)||$15.53||Prohibited||Prohibited|
|Novato (large employer 26-99)||$16.07||Prohibited||Prohibited|
|Novato (very large employer 100 or more)||$16.32||Prohibited||Prohibited|
|Pasadena (small employer 25 or fewer and nonprofits)||$16.11||Prohibited||Prohibited|
|Pasadena (large employer 26 or more)||$16.11||Prohibited||Prohibited|
|Petaluma (small employer 25 or fewer)||$17.06||Prohibited||Prohibited|
|Petaluma (large employer 26 or more)||$17.06||Prohibited||Prohibited|
|Santa Monica (small employer 25 or fewer)||$15.96||Prohibited||Prohibited|
|Santa Monica (large employer 26 or more)||$15.96||Prohibited||Prohibited|
|Santa Rosa (small employer 25 or fewer)||$17.06||Prohibited||Prohibited|
|Santa Rosa (large employer 26 or more)||$17.06||Prohibited||Prohibited|
|Sonoma (small employer 25 or fewer)||$16.00||Prohibited||Prohibited|
|Sonoma (large employer 26 or more)||$17.00||Prohibited||Prohibited|
|South San Francisco||$16.70||Prohibited||Prohibited|
|District of Columbia||$16.10||$6.00||$10.10|
|Chicago (employers with 4 to 20 employees)||$14.50||$8.70||$5.80|
|Chicago (employers with 21 or more employees)||$15.40||$9.24||$6.16|
|Maryland (Employers with at least 15 employees)||$12.50||$3.63||$8.87|
|Employers with no more than 14 employees)||$12.20||$3.63||$8.57|
|Montgomery County (small employer 10 or fewer)||$14.00||$4.00||$10.00|
|Montgomery County (mid-sized employer – 11-50 and certain nonprofit and service providers)||$14.50||$4.00||$10.50|
|Montgomery County (large employer 51 or more)||$15.65||$4.00||$11.65|
|Prince George’s County (14 employees or fewer)||$12.80||$3.63||$9.17|
|Prince George’s County (Employers with 15 or more employees)||$13.25||$3.63||$9.62|
|Minnesota (less than $500,000 annual gross sales)||$8.63||Prohibited||Prohibited|
|Minnesota (more than $500,000 annual gross sales)||$10.59||Prohibited||Prohibited|
|Minneapolis (small employer 100 or less)||$13.50||Prohibited||Prohibited|
|Minneapolis (large employer 101 or more)||$15.00||Prohibited||Prohibited|
|St. Paul (employers with five or fewer)||$10.75||Prohibited||Prohibited|
|St. Paul (employers with more than five but fewer than 101 employees)||$12.00||Prohibited||Prohibited|
|St. Paul (employers with more than 100 but fewer than 10,001 employees)||$13.50||Prohibited||Prohibited|
|Nevada (health benefits offered)||$9.50||Prohibited||Prohibited|
|Nevada (no health benefits offered)||$10.50||Prohibited||Prohibited|
|Santa Fe County||$12.95||$3.88||$9.07|
|New York City – Tipped Service Employees||$12.50||$15.00||$2.50|
|New York City – Tipped Food Service Workers||$10.00||$15.00||$5.00|
|New York State – Tipped Service Employees||$11.85||$14.20||$2.35|
|New York State – Tipped Food Service Workers||$9.45||$14.20||$4.75|
|Fast Food Employees||Prohibited||$15.00||Prohibited|
|Long Island (Suffolk and Nassau County) and Westchester – Tipped Service Employees||$12.50||$15.00||$2.50|
|Long Island (Suffolk and Nassau County) and Westchester – Tipped Food Service Employees||$10.00||$15.00||$5.00|
|Seattle – Schedule 2 Employers (fewer than 500 employees in US) minimum compensation*||$18.69||Prohibited||Prohibited|
|Seattle – Schedule 1 Employers (more than 500 employees in US)||$18.69||Prohibited||Prohibited|
*Small employers pay an hourly minimum wage and reach the minimum compensation rate through employee tips reported to the IRS and/or payments toward an employee’s medical benefits plan. If the tips and/or payments toward medical benefits do not add-up to the minimum compensation rate, the small employer makes up the difference.
In addition to the tipped minimum wage updates for 2023, if you want to see the amounts from previous years, we’ve compiled a list below with links to each resource from the US Department of Labor.
|Minimum Wages for Tipped Employees 2003 through 2022|
Try our tax and tip calculator to tally the numbers and keep your books together.
It pays to remind your tipped employees that tipped reporting is important because Uncle Sam considers them taxable income. When employees don’t report tips to their employer, then the employer is not liable for the their share of Social Security and Medicare taxes on the unreported tips.The employer won’t know what’s owed until they receive a notice and demand for the taxes from the IRS. So let’s cover ways to report them.
Tip reports should be provided to the employer no later than the 10th of the month after tips were received. You should also advise employees to keep a copy of each report for their own records.
Before reporting employees’ tips, you must withhold and deduct the appropriate amount of Social Security, Medicare, and income tax from their wages (also known as FICA taxes).
Tips are also subject to FUTA — the Federal Unemployment Tax. You are then responsible for reporting these on a quarterly basis, through IRS Form 941.
“OnPay is the best online payroll. You have tremendous flexibility in designating how people are paid — hourly, tips, and commission are all possible — and with fully automated tax calculation and payments to the correct government agencies, they let me focus on doing my business instead of spending inordinate amounts of time trying to make sure I am doing my payroll correctly. ”
— Ray Nyugen, Charming Nails DC
With a few exceptions, any employee who is paid on an hourly basis and works more than 40 hours per week is subject to overtime pay. Overtime pay is one-and-a-half times regular pay. However, for tipped workers, the process is slightly more complicated than just multiplying your employees’ hourly wage by 1.5. Here’s how to calculate overtime pay for tipped employees:
Now let’s look at an example with a tipped employee, Sarah, who worked 15 overtime hours in a week, and is getting paid the federal minimum wage:
In this example, Sarah would get paid $86.40 for the 15 hours of overtime worked in addition to her regular hours.
Now that we’ve covered the basics of tipped wages and reporting, you should be able to navigate the ins and outs of this important part of your business operations with confidence. If you still need help, try this free payroll calculator, which can simplify the process for you even more and ensure you’re doing everything properly. Once you’re finished crunching the numbers, check out our guide to payroll records retention so you know what records to keep and for how long.
Please note all material in this article is for educational purposes only and does not constitute tax or legal advice. You should always contact a qualified tax, legal or financial professional, in your area for comprehensive tax or legal advice.