An FLSA provision allowing employers to count a portion of employee tips toward satisfying the minimum wage obligation. The federal tip credit allows a cash wage as low as $2.13 per hour if tips bring total hourly pay to $7.25.
Why Tip Credit matters for employers
To lawfully take the federal tip credit, the employer must inform tipped employees of the tip credit before using it, ensure the employee actually receives sufficient tips to bring total hourly pay to at least $7.25, and pay the difference (make up the shortfall) in any workweek where tips are insufficient. Many states prohibit the tip credit entirely or require a higher cash wage than the federal minimum.
The tip credit can be eliminated retroactively if the employer requires tipped employees to share tips with non-customarily tipped employees (prior to 2018 rules), takes improper deductions, or fails to provide proper notice. Losing the tip credit means the employer owes the full minimum wage for all tipped hours, plus back pay and potential liquidated damages.
How BEG handles Tip Credit for clients
BEG Managed Payroll handles Tip Credit as part of a fully managed payroll service at $25-$45 per employee per month. Clients do not need to track compliance rules, filing deadlines, or calculation methods related to Tip Credit on their own. Everything is included. Learn about BEG Managed Payroll.
Frequently asked questions
Do employers have to manage Tip Credit themselves?
No. A managed payroll provider handles Tip Credit as part of full-service payroll. BEG manages this for clients at $25-$45 PEPM with no system migration required.
What happens if Tip Credit is handled incorrectly?
Errors related to Tip Credit can trigger IRS penalties, state agency assessments, or employee disputes. Catching and correcting errors before filing is far less costly than after-the-fact corrections.
How does BEG handle Tip Credit for managed payroll clients?
BEG tracks, calculates, and remits everything related to Tip Credit as part of fully managed payroll. Clients do not need to monitor compliance -- that is included in the service at $25-$45 PEPM.
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About the author
Anthony Moretti is VP of Sales at Business Executive Group, where he builds BEG's managed payroll and HR service verticals for employers across Dallas-Fort Worth and nationwide. He writes the BEG Payroll Glossary to give employers plain-English answers on payroll and compliance.
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