Tip credit explained: how the tipped minimum wage works

The tip credit is the rule that lets an employer pay you less than minimum wage per hour, as long as your tips make up the rest. It is why the tipped minimum wage under federal law is $2.13 while the regular minimum wage is $7.25. This guide has the tip credit explained in plain terms: how it works, the weekly make-up rule, the notice your employer owes you, and how much it varies from state to state.

How the tip credit works

Two numbers matter:

• The minimum wage where you work.
• The cash wage, the hourly pay your employer actually puts on your check before tips.

The gap between them is the tip credit: the part of minimum wage your employer is counting your tips toward. Under federal law the minimum wage is $7.25 and the lowest allowed cash wage is $2.13, so the largest federal tip credit is $5.12 an hour.

The tip credit does not mean your employer keeps any of your tips. Your tips are still yours, apart from a valid tip pool. The credit only changes how much cash wage the employer has to pay on top of them.

A few conditions apply before an employer can use it:

• You must be a tipped employee. Under federal law that means you customarily and regularly get more than $30 a month in tips. Some states set their own threshold; Pennsylvania, for example, uses more than $135 a month.
• The credit can never be more than the tips you actually received.
• You must keep all your tips, except what goes into a valid tip pool.
• You must be told about the tip credit in advance (more on that below).
• Your state must allow it. Seven states do not.

If you also work a separate job that does not get tips, such as a shift on the line in the kitchen, the tip credit does not apply to those hours. See dual jobs.

The weekly make-up rule

Your cash wage plus the tips you keep has to reach the full minimum wage for every hour you work. Under federal law this is measured one workweek at a time. If a week falls short, your employer has to pay the difference. Payroll often calls this a tip make-up or minimum wage adjustment.

The employer cannot average a great week with a slow one. If your pay period is two weeks long, each week is checked on its own.

"Tips you keep" means tips after any required tip-out or pool. The employer can only count the tips you end up with.

Some states are stricter. Massachusetts checks the make-up at the end of each shift, not each week. Hawaii allows a tip credit only if your cash wage plus tips averages at least $7.00 an hour above the state minimum wage.

The tip credit notice

Before an employer takes a tip credit, federal rules say it has to tell you:

• the cash wage it will pay you,
• the amount of tip credit it is claiming,
• that the credit cannot be more than the tips you actually receive,
• that you keep all your tips, except through a valid tip pool among employees who customarily and regularly get tips, and
• that the tip credit does not apply to anyone who has not been told these things.

Federal law allows the notice to be spoken, but some states require it in writing. New York, Michigan, Arizona and D.C. are examples. North Carolina also requires your signed tip certification each month or pay period.

If you were never given a tip credit notice, the employer may not take the credit. That can mean the full tip credit for every hour you worked is owed to you.

Tipped minimum wage by state: three groups

State law can only add protection on top of federal law. That splits the country into three rough groups. Your state page has the exact current numbers and any local rates.

1. No tip credit at all

Seven states require the full state minimum wage before tips: Alaska, California, Minnesota, Montana, Nevada, Oregon and Washington. Some cities in those states set an even higher minimum. Your tips come on top.

2. A cash wage well above $2.13

Many states allow a tip credit but cap it, so the cash wage stays much closer to minimum wage. Some set a fixed credit; others set the cash wage as a share of the minimum, like Michigan (40 percent in 2026), D.C. (56 percent from July 1, 2026) and Illinois (60 percent). A few examples:

Arizona, Colorado and Illinois have cities with their own higher rates. New York sets different rates by region.

3. $2.13, or close to it

About a third of states follow the federal $2.13 cash wage, including Texas, Georgia, Alabama, Tennessee and North Carolina. A handful set a cash wage only slightly higher, such as Pennsylvania at $2.83.

Watch for states that pair a $2.13 cash wage with a state minimum wage above $7.25. In Virginia the minimum wage is $12.77 for 2026 but the cash wage is still $2.13, so your tips have to cover up to $10.64 an hour. Nebraska works the same way, with a $15.00 minimum wage since January 1, 2026.

Worked examples

A normal week at $2.13

Say you work 30 hours in a federal $2.13 state and keep $450 in tips. Your cash wage is 30 times $2.13, or $63.90. With tips you made $513.90, well over the $217.50 that 30 hours at $7.25 requires. No make-up is owed.

A slow week inside a two-week pay period

Now say you work 25 hours each week of a two-week pay period. You keep $400 in tips the first week and $80 the second.

• Week 2 minimum: 25 times $7.25 is $181.25.
• Week 2 pay: 25 times $2.13 is $53.25, plus $80 in tips, for $133.25.
• Shortfall: $181.25 minus $133.25 is $48.00.

Across both weeks you made far more than minimum wage, but week 2 still owes $48.00. Averaging the two weeks would hide it.

A $2.13 state with a higher minimum wage

In Virginia, 30 hours at the $12.77 state minimum is $383.10. Your cash wage is $63.90, so your tips need to be at least $319.20. If you kept $250 in tips, the employer owes $69.20.

A state with no tip credit

In Washington, 30 hours at the $17.13 state minimum wage (2026) is $513.90 before a single tip. Everything customers leave is on top of that.

Overtime

The tip credit also changes the overtime rate. Under federal rules it is 1.5 times the full $7.25, minus the $5.12 credit: $5.755 an hour. Five overtime hours come to $28.78, not the $15.98 you get from 1.5 times $2.13. The tipped overtime guide has the details.

The tip credit calculator runs these numbers for your state.

Common tip credit mistakes on a paycheck

• A cash wage below your state's tipped minimum. Payroll systems sometimes keep paying the federal $2.13 in a state that requires more, or miss a January or July rate change.
• A tip credit in a state that does not allow one. In the seven no-credit states, any hourly rate below the state minimum wage is short.
• Overtime at 1.5 times the cash wage. The overtime rate has to start from the full minimum wage.
• No make-up in a slow week. Holidays, bad weather and slow seasons are when this tends to show up.
• The tipped rate on non-tipped work. Hours in a separate job that does not get tips should be paid at the full minimum wage. Some states also limit how much non-tipped side work can be paid at the tipped rate; New York and Pennsylvania both do.
• No notice. If nobody ever explained the tip credit to you, ask to see the notice. Some states require it in writing.

What to do if your tips fall short

1. Track tips by workweek. Write down card tips, cash tips and tip-outs after every shift. Your own record counts if there is ever a dispute.
2. Find the slow weeks. For each week, multiply your hours by the minimum wage. Compare that with your cash wage plus the tips you kept.
3. Look for a make-up line on your stub. If a week came up short and no adjustment appears, that is the item to ask about. The pay stub guide shows where it usually sits.
4. Ask payroll first. Bring the numbers. The letter template lays them out politely.
5. File a wage claim if it is not fixed. Your state labor agency or the U.S. Department of Labor takes wage claims for free, and you do not need a lawyer. See what to do if you are underpaid.

The paycheck checker does the weekly math from your stub and your tips. TruWage is a calculator, not legal advice.