How to Manage FLSA Tip Credit

If you run a business that employs workers in a tipping profession, you've probably heard rumors about the Fair Labor Standards Act (FLSA) tipping credit. But you might be wondering what it is, if it's legal in your state, and how it might affect your payroll process.

You may be surprised that FLSA tip credit can help you manage payroll because it helps you keep your labor costs under control. Because managing payroll isn't always the most fun part of running a business. Between collecting timesheets and calculating benefits, taxes, and time off, the process can be tedious.

Therefore, in this article, we will explore:

What is FLSA tip credit Who is eligible for the FLSA tip credit Tip credit rules broken down by state How to Calculate Tip Credit, Step by Step HR for people who don't do HR.

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What is FLSA Tip Credit?

The Fair Labor Standards Act (FLSA) tip credit is a system that allows companies that employ tip workers to use tips to meet their minimum wage obligation. This means – if the specific state allows it – that employers can pay employees less than the full minimum wage, as long as they earn enough tips to make up the difference. It should be noted that the federal minimum wage in the United States is $7.25 per hour.

For example, in 2022, Illinois set its total minimum wage at $12 per hour. The maximum state tip credit is $4.80. This means that employers only have to pay their staff $7.20 per hour, provided they claim tip credit and their staff earn more than $4.80 per hour. tips.

Many states - and even some cities - have their own total minimum wage rates. In cases where the state minimum wage is higher than the federal minimum wage, employers are required to use the higher amount. For example, the minimum wage in Colorado is $12.56 an hour, while that figure is $14.25 in the state of Massachusetts and $7.25 in North Dakota.

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And if a staff member's average tips per hour is less than their state's maximum tip credit, which means they don't earn enough tips, the employer is obligated to compensate them for the difference and to ensure that he is paid the minimum total. salary amount.

Tip credit rules by state

States and some cities are allowed to set their own tip credit laws and minimum wage rules. So while federal law dictates a maximum tip credit of $5.12 per hour, many areas have different rates.

Some states don't even recognize tip credit at all, forcing business owners to pay the same minimum wage to employees who tip as to employees who don't, such as dishwashers and bus drivers. These states and territories are:

Alaska American Samoa California Commonwealth of the Northern Mariana Islands Guam Minnesota Montana Nevada Oregon Washington

In several states, employers are required to tip their workers a minimum cash wage above the federal FLSA rate, which is $2.13 per hour. This means that the maximum tip credit may also vary.

For example, in Delaware, the maximum tip credit is $8.27 per hour and the minimum cash wage is $2.23. This amounts to a total of $10.50. In Oklahoma, on the other hand, the state minimum wage is $7.25 and the maximum tip credit is $5.12, making the cash minimum wage $2.13.