Tip Pay

Requirements

How Tips Affect Payroll

© SurePayroll, Inc. 2014

What are the tip pay

requirements?

1st

For employees that receive tips, the Federal Labor

Standards Act (FLSA) allows employers to pay $2.13

per hour when tipped employees receive at least $30

in tips during a month.

U.S. Department of Labor

2nd

• The hourly regular rate of pay must add up to be at

least the minimum wage of $7.25 per hour for the

workweek.

• Any shortage is paid by the employer to make up

the difference.

3rd

• There is an allowable “tip credit” that the employer

can take under provisions of the FLSA.

• With a pay rate of $2.13 per hour when the

minimum wage is $7.25, the allowable tip credit is

$5.12 per hour ($7.25 - $2.13).

How does that tip credit work?

Let’s look at an example.

If your state’s minimum wage is $8.15 and it gives a

tip credit of 33%, here is the payroll calculation:

Example

The calculation to determine the net minimum wage to pay:

State allowed tip credit of 33%: $8.15 x 33% = $2.69

Minimum wage (net) for the state: $8.15 - $2.69 = $5.46

In this scenario, you must pay $5.46 per hour to your tipped employee.

This is more than the FLSA required amount of $2.13.

Why does this matter?

It significantly reduces your employment costs if

your employees receive at least $30 in tips during

the month.

In the example, you would pay $5.46 per hour

instead of $8.15.

*NOTE! Some states prohibit the use of tip credits and

others may have higher or lower rates. Employers

must choose the law that compensates employees

the most.

4 Guidelines Employers Must Follow When Using the Tip Credit

1st

The tipped credit amount needs to be equal to or less

than the tipped amount the employee actually

receives.

2nd

Employers must tell the employee about the tipped

credit before taking advantage of it.

3rd

• The tips that an employee receives need to be

kept by the employee.

• Note: There must be “tip pooling” in situations

where it’s common, such as restaurant payroll

between waiters, hostesses, etc.

4th

When tips are given using a credit card, the

compensation must be paid the next payday.

What Employers Need to Know

• Check with your state to ensure you can use a tip credit.

• Your employees must be paid at least the minimum wage for the workweek (defined as 40 hours by the FLSA).

• If an employee’s wages total less than the minimum, you need to compensate the employee for the difference.

Paying Tipped Employees

can be Hard.

SurePayroll Makes it Easy.

Easy. Online. SurePayroll.