Restaurant Payroll: Tipped Minimum Wage, Overtime for Tipped Employees, and State-by-State Rules

The federal minimum wage for tipped employees is $2.13 per hour, but that number is misleading. The employer must ensure that the employee’s total compensation (the cash wage plus tips) equals or exceeds the full federal minimum wage of $7.25 per hour. If tips do not make up the difference, the employer must pay additional cash wages to cover the gap. This is the “tip credit” under the Fair Labor Standards Act (FLSA), and it is the foundation of restaurant payroll. The maximum tip credit an employer can take is $5.12 per hour ($7.25 minus $2.13), and it only applies if the employee actually receives enough in tips to reach $7.25. Seven states (California, Oregon, Washington, Nevada, Minnesota, Montana, and Alaska) do not allow a tip credit at all, meaning the employer must pay the full state minimum wage before tips.

How does the tip credit against minimum wage work?

Under 29 USC 203(m), an employer may take a “tip credit” toward its minimum wage obligation for employees who customarily and regularly receive more than $30 per month in tips. The tip credit is the difference between the full minimum wage and the direct cash wage the employer actually pays.

The mechanics: the federal minimum wage is $7.25/hour. The minimum direct cash wage for tipped employees is $2.13/hour. The maximum tip credit is $5.12/hour ($7.25 - $2.13). If the employee’s tips during a workweek average at least $5.12/hour, the employer’s minimum wage obligation is satisfied. If tips average less than $5.12/hour, the employer must increase the direct cash wage to cover the shortfall.

The tip credit has conditions. The employer must:

1. Inform the employee about the tip credit provisions before taking the credit (the “tip credit notice”)
2. Allow the employee to retain all tips (except for a valid tip pool)
3. Pay a direct cash wage of at least $2.13/hour
4. Ensure the employee’s total compensation (cash wage plus tips) equals or exceeds the minimum wage for every workweek

The tip credit notice requirement is frequently missed. The employer must explain to the employee: the amount of cash wage the employer will pay, the additional amount claimed as a tip credit, that the tip credit cannot exceed the actual tips received, that all tips are the property of the employee (unless there is a valid tip pool), and that the tip credit will not apply unless the employee has been informed of these provisions. Failure to provide the notice means the employer cannot take the tip credit and must pay the full minimum wage.

How is overtime calculated for tipped employees?

Overtime for tipped employees is where most payroll errors occur. The overtime rate is not time-and-a-half of the $2.13 cash wage. It is time-and-a-half of the full minimum wage, minus the tip credit.

The calculation: the full minimum wage is $7.25. Time-and-a-half is $10.875. The tip credit of $5.12 still applies (the employer does not get an increased tip credit for overtime hours). The overtime cash wage is $10.875 - $5.12 = $5.76/hour.

For employees who perform both tipped and non-tipped duties (a server who also does prep work, for example), the 80/20 rule (or its successor under the current DOL regulations) determines when the tip credit applies. Under the current DOL rule (effective December 2021, partially enjoined and then reinstated), the tip credit cannot be taken for time spent on non-tip-producing duties that exceeds 20% of the employee’s total hours in a workweek, or for any continuous period of more than 30 minutes spent on non-tip-producing duties. This rule is subject to ongoing litigation and regulatory changes, so employers should check the current status.

What are the state-by-state tipped minimum wage differences?

The variation across states is extreme, and it determines the economics of restaurant payroll:

No tip credit states (employer pays full state minimum wage before tips): California ($16.50/hr for 2025), Washington ($16.66), Oregon ($14.70-$15.95 depending on region), Nevada ($12.00), Minnesota ($11.13), Montana ($10.55), Alaska ($11.73). In these states, tipped employees receive the full minimum wage as a cash wage, and tips are entirely additional compensation. The employer’s labor cost is significantly higher.

Low tipped minimum wage states (at or near the federal $2.13): Texas ($2.13), Georgia ($2.13), Indiana ($2.13), Utah ($2.13), Tennessee ($2.13), Kansas ($2.13), Kentucky ($2.13), Nebraska ($2.13), North Carolina ($2.13), Virginia ($2.13), South Carolina ($2.13), Wyoming ($2.13). These states follow the federal tipped minimum wage.

States with tipped minimum wages between the extremes: New York ($10.65 for food service workers in NYC, lower outside NYC), Florida ($8.98 for tipped employees for 2025, increasing annually through 2026 to reach $15 for non-tipped, tipped rate is $3.02 below the non-tipped rate), Colorado ($11.79 for tipped, $3.02 tip credit), Arizona ($11.35 for tipped, $3.00 tip credit), Massachusetts ($6.75 for tipped), Connecticut ($6.38 for tipped).

The state-by-state variation means that a restaurant chain operating in multiple states cannot use a single payroll configuration. Each state’s tipped minimum wage, tip credit rules, and overtime rules must be programmed separately in the payroll system.

What tip pooling rules apply?

Tip pooling (where tipped employees share tips with other employees) is permitted under the FLSA, but the rules depend on whether the employer takes a tip credit.

If the employer takes a tip credit: The tip pool can only include employees who customarily and regularly receive tips (servers, bartenders, bussers, hosts in some cases). The employer cannot require tipped employees to share tips with non-tipped employees (cooks, dishwashers, janitors).

If the employer does NOT take a tip credit (pays the full minimum wage): The employer can require a broader tip pool that includes non-tipped employees (back-of-house workers). The Consolidated Appropriations Act of 2018 amended the FLSA to allow this broader pool when no tip credit is taken. In no-tip-credit states (California, Washington, Oregon, etc.), this means tip pooling can include kitchen staff.

Managers and supervisors: Managers and supervisors are prohibited from participating in any tip pool, regardless of whether the employer takes a tip credit. A “manager” for this purpose is anyone with authority to hire, fire, direct work, or control schedules. A working supervisor who regularly performs tipped duties alongside non-supervisory employees is still excluded from the pool.

The penalty for tip pooling violations: the employer forfeits the tip credit for the affected employees (and must pay back the full minimum wage for all hours), plus potential liquidated damages equal to the back pay, plus attorney’s fees.

What are the most common DOL enforcement actions?

The Department of Labor’s Wage and Hour Division targets restaurants more frequently than any other industry for FLSA violations. The most common findings:

Overtime miscalculation. Using the cash wage ($2.13) as the base for overtime instead of the full minimum wage ($7.25). This is the single most common violation.

Failure to make up the tip credit shortfall. Paying the tipped minimum wage without tracking whether total compensation (cash wage plus tips) meets the full minimum wage for each workweek.

Improper tip pooling. Including managers or non-tipped employees in the pool when the employer takes a tip credit.

Off-the-clock work. Requiring employees to perform opening or closing duties (setting up the restaurant, rolling silverware, cleaning) before clocking in or after clocking out.

Misclassification as exempt. Classifying assistant managers or shift leaders as exempt salaried employees when their duties do not meet the executive, administrative, or professional exemption tests under the FLSA. The salary threshold for exemption was increased to $58,656/year (effective July 2025), which means many restaurant “managers” who earn less than this threshold are non-exempt and entitled to overtime.

DOL investigations can result in: back wages (up to 2 years, or 3 years for willful violations), liquidated damages (equal to the back wages), civil money penalties (up to $2,451 per violation for repeat or willful violations), and injunctive relief.

What should I do next?

If your restaurant takes the tip credit, confirm that: the tip credit notice has been provided to all tipped employees, overtime is calculated on the full minimum wage (not the cash wage), and tip pooling includes only eligible employees. If you operate in multiple states, verify that each location’s payroll configuration reflects the correct state tipped minimum wage. If your assistant managers earn less than $58,656 and regularly work more than 40 hours, review their exemption classification.

• FICA tip credit, the tax credit that offsets the employer’s FICA cost on tipped employees (the tax side of tipped-employee payroll)
• Restaurant tip reporting and Form 8027, the annual filing requirement and tip allocation rules
• Restaurant bookkeeping, the chart of accounts and POS integration that feeds both payroll and financial reporting
• Restaurant entity structure, when the S-corp election saves self-employment tax on the owner’s income above the salary
• Trust fund recovery penalty, personal liability when employment taxes go unremitted

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.