Minimum Wage for Tipped Employees by State: An Employer's Guide for 2026

In 2026, the federal tipped minimum wage is still $2.13 per hour — a rate unchanged since 1991. But for most employers, that number is only the starting point. Seven states prohibit tip credits entirely, requiring you to pay tipped workers the full state minimum wage before a single tip is counted. Dozens more have set their own tipped wage floors well above the federal rate. And even in states where tip credits are allowed, the rules around overtime, non-tipped duties, tip pooling, and notification requirements add layers of complexity that trip up employers every year.

This guide covers everything you need to know as an employer: how the tip credit works, which states prohibit it, how to calculate tipped wages and overtime correctly, the 80/20 rule for non-tipped duties, tip pooling requirements, reporting obligations, and the most common compliance mistakes to avoid — along with a full 2026 state-by-state rate table.

What is a tipped employee?

A tipped employee is defined by the Department of Labor (DOL) as an "employee engaged in an occupation in which they customarily and regularly receive more than $30 a month in tips." Some states use a lower threshold of $20/month — including Massachusetts, North Carolina, and Texas. This classification matters because it determines whether you can pay the lower tipped minimum wage or must pay the full minimum wage.

Tipped employees are typically found in roles where direct customer interaction is frequent and tipping is customary. Common roles include:

• Bartenders: Serving drinks and providing a pleasant experience for patrons

• Servers and waitstaff: Taking orders, delivering food, and attending to customers' needs in restaurants

• Other food service workers: Including hosts, bussers, and front-of-house support staff who participate in tip pools

• Hotel and hospitality staff: Bellhops, valets, concierge staff, and room service workers

• Taxi and delivery drivers: Providing transportation or delivery services where gratuities are regularly given

• Salon and beauty workers: Hair stylists, nail technicians, and aestheticians who receive tips for their services

• Casino floor staff: Dealers and other employees in gaming environments where tipping is customary

What is a tip?

A tip, also known as a gratuity, is an optional extra payment that customers choose to give to employees as a reward for good service. Tips are the property of the employee and cannot be kept by the employer under federal law. The DOL recognizes several types of tips:

• Cash tips: Directly given to employees by customers in the form of cash

• Electronic tips: Received through electronic payment methods such as credit cards, debit cards, or gift cards

• Tip pools and tip sharing: Employees may share tips among a group, ensuring fair distribution based on roles and hours worked

Employee tips vs. service charges: What’s the difference?

While tips and service charges both contribute to an employee’s overall pay, they are fundamentally different and must be treated separately under federal regulations.

Tips are voluntary and determined by the customer based on the quality of service provided. Service charges, on the other hand, are predetermined amounts added to the bill by the employer. These charges are controlled by the establishment and are often mandatory, especially in larger groups or special events.

Key differences:

• Tips: Discretionary and at the customer’s discretion. Belong to the employee. Can count toward the tip credit in states that permit it.

• Service charges: Pre-set and collected by the employer. Always treated as employer income, subject to FICA and income tax withholding from the outset. Cannot be used toward tip credit calculations.

IRS guidelines on service charges

According to the IRS, service charges must be treated as regular income for the employer — the entire amount is considered taxable income regardless of how it is distributed to employees. Key points:

• Exclusion from tip reporting: Employees should not include service charges in their tip reports.

• Tax obligations: Service charges are subject to Social Security tax, Medicare tax, and federal income tax withholding.

• Tip replacement: If a service charge is labeled as a tip replacement, it must be fully distributed to employees.

• Transparency: Employers must clearly communicate how service charges are handled to both employees and customers.

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States with a lower tipping minimum

The federal threshold for tipped employee status is more than $30 per month in tips. Several states use a lower threshold of $20 per month, meaning more workers qualify as tipped employees in those jurisdictions:

Hawaii

Hawaii uses the $20/month threshold, reflecting the state’s strong tourism industry where tips make up a significant share of worker compensation. Note that Hawaii’s tip credit is conditional: employers may only claim it if the employee’s combined wages and tips exceed the state minimum wage by at least $7.00 per hour. Hawaii’s 2026 minimum wage is $14.00/hr.

Massachusetts

Massachusetts uses a $20/month threshold and allows a tip credit: the 2026 tipped minimum wage is $6.75/hr against a $15.00 state minimum wage. Employers must still ensure total hourly earnings (wage + tips) reach $15.00/hr. Massachusetts tip credit rules are enforced separately from the state’s “One Fair Wage” advocacy efforts — as of 2026, the tip credit remains in effect.

North Carolina

North Carolina uses a $20/month threshold and applies the federal tipped minimum wage of $2.13/hr. A unique NC requirement: employers must obtain a signed monthly certification from employees confirming their tips before claiming the tip credit.

Texas

Texas also uses the $20/month threshold and follows the federal tipped minimum wage of $2.13/hr. If total earnings don’t reach $7.25/hr in any workweek, the employer must make up the difference.

States that follow the federal tipped minimum wage

Eighteen states have no state-level minimum wage law above the federal floor, or set their state rate at or below $7.25/hr, meaning the federal tipped minimum wage of $2.13/hr applies for FLSA-covered employers. These include Alabama, Georgia, Indiana, Iowa, Kansas, Kentucky, Louisiana, Mississippi, Nebraska (tipped wage), North Carolina, North Dakota, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Utah, and Wyoming.

In all of these states, the employer’s obligation is the same: pay at least $2.13/hr in cash wages, ensure the employee’s tips bring total hourly earnings to at least $7.25, and make up any shortfall in the same pay period it occurs.

How does tipped minimum wage work? Key considerations

Under the FLSA, the minimum hourly wage for tipped employees must be at least $2.13. Employees may have a lower base wage as long as their total earnings with tips included equal at least $7.25 per hour. If they don’t, the employer must make up the shortfall in that same pay period.

How to calculate the minimum wage for tipped employees: The server minimum wage example

To illustrate how the tipped minimum wage works in practice, let’s consider the example of a server calculating their total earnings for a shift.

Scenario 1: Adequate tips

• Base hourly wage: $2.13 per hour

• Shift duration: 8 hours

• Total tips received: $50

• Tips per hour: $50 ÷ 8 hours = $6.25 per hour

• Total hourly earnings: $2.13 (base wage) + $6.25 (tips) = $8.38 per hour — compliant, no shortfall

Scenario 2: Insufficient tips

• Base hourly wage: $2.13 per hour

• Shift duration: 8 hours

• Total tips received: $30

• Tips per hour: $30 ÷ 8 hours = $3.75 per hour

• Total hourly earnings: $2.13 + $3.75 = $5.88 per hour — shortfall of $1.37/hr

The employer must add $1.37/hr to bring total earnings to $7.25 — this must happen within the same pay period, not averaged over time.

When managing tipped employees, key compliance considerations include:

• Complying with minimum wage laws: Regularly monitor tip income to ensure total earnings meet the applicable minimum wage — state rate where higher than federal.

• Proper tip reporting and documentation: Employees must report all tips; employers must track and document them accurately for tax and wage compliance.

• Addressing wage shortfalls: Make up any tip shortfall within the same pay period — not the next one, not as an average.

• Educating employees about tip reporting: Train employees on their responsibility to report tips so tax withholding and wage calculations are accurate.

The 80/20 rule: Tip credit and non-tipped duties

One of the most frequently violated tipped wage rules involves non-tipped duties. Under the DOL’s “80/20/30” rule, employers cannot claim the tip credit for time a tipped employee spends on duties that are not related to their tipped occupation and that exceed either:

• 20% of their total hours in a workweek

• 30 continuous minutes at any one time

For example, if a server spends more than 20% of their shift rolling silverware, restocking, or cleaning tasks that are not directly supporting the tipping occupation, the employer must pay the full minimum wage — not the tipped cash wage — for that excess time. This applies even in states that permit tip credits. Employers should track duties by type and document the time spent on each to avoid inadvertently forfeiting the tip credit for an entire workweek.

What is a tip credit?

A tip credit allows employers to count a portion of an employee’s tips toward fulfilling the minimum wage requirement under the FLSA. It allows employers to pay a lower cash wage to tipped employees, provided total earnings from tips and base pay meet or exceed the federal minimum wage of $7.25 per hour.

The maximum federal tip credit is $5.12 per hour — meaning employers can pay as little as $2.13/hr in cash as long as tips make up the rest. To legally claim the tip credit, employers must notify employees in advance (orally or in writing) of: (1) the cash wage being paid, (2) the amount being claimed as a tip credit, (3) that the tip credit cannot exceed tips actually received, and (4) that tips belong to the employee. Failure to provide this notification invalidates the tip credit retroactively.

States that prohibit tip credits

Seven states prohibit tip credits entirely and require employers to pay tipped employees the full state minimum wage before any tips are counted. These are:

• Alaska ($13.00/hr in 2026)

• California ($16.90/hr in 2026)

• Minnesota ($11.41/hr for large employers in 2026)

• Montana ($10.85/hr for businesses with >$110K gross sales in 2026)

• Nevada ($12.00/hr in 2026)

• Oregon (varies by region: $14.05–$16.30/hr in 2026)

• Washington ($17.13/hr in 2026)

Washington, D.C. is also phasing out its tip credit under Initiative 82, with the tipped minimum wage scheduled to reach the full DC minimum wage of $17.95/hr by 2027.

In these jurisdictions, tips are purely supplemental income. They belong entirely to the employee and cannot reduce the employer’s wage obligation by a single cent.

Minimum wage for tipped employees by state

The table below provides the 2026 state minimum wage, maximum tip credit, and minimum tipped wage for all 50 states and Washington, D.C. States marked with * do not permit tip credits — the tipped wage equals the full state minimum wage.

Always apply the higher of the federal or state tipped minimum wage. In states with higher rates, the state rate controls. Employers must accurately track tips and verify that total hourly earnings (cash wage + tips) meet the applicable minimum wage. Failure to comply can result in back pay liability, civil penalties, and DOL investigations.

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How to report tips: Information for employers and workers

Accurately reporting tips is a critical aspect of wage and hour compliance for both employers and employees. Since tips constitute taxable income, understanding the proper reporting procedures ensures legal compliance and avoids tax penalties.

Employee responsibilities

Employees must report all tips to their employer and include them on their individual tax return (IRS Form 1040). Accurate tip records should include the employee’s full name, Social Security number, address, the time period covered, and total tips received. Employees can use IRS Form 4070 (Employee’s Report of Tips to Employer) or a customized equivalent. If employees fail to report tips to their employer, they must declare unreported tips on IRS Form 4137.

Employer responsibilities

Employers must withhold FICA taxes (Social Security and Medicare) from reported tip income and report them on IRS Form 941. Tips are also subject to FUTA. Employers with large food or beverage establishments may need to file IRS Form 8027 annually. In states where tip credits are used, employers must also verify per-pay-period that the tip credit does not exceed tips actually received — and must pay the shortfall immediately if it does.

Rippling: Stay compliant with tipped wage laws across all 50 states

Managing tipped wages across multiple states — with different cash wage floors, tip credit rules, and overtime calculations — is one of the more complex payroll challenges employers face. Rippling Payroll handles tipped wage calculations automatically, applying the right state or local rate for every employee based on where they work — so you never accidentally apply a federal rate in a state that prohibits it.

With Rippling Time & Attendance, you can track hours by job type — making it straightforward to document tipped versus non-tipped duty time for 80/20 rule compliance. Approved hours sync directly to payroll, eliminating manual entry and reducing the risk of shortfall errors.

Rippling also notifies you of changes that affect compensation — like when an employee’s location changes or their compa-ratio falls outside your set bands — so compliance issues are flagged before they become violations.

Frequently Asked Questions