Tip Credit Definition

Term Definition
In some states, employers are allowed to pay tipped employees wages that are lower than the federal minimum wage because the difference between the tips and the hourly wage equal or exceed the federal minimum wage rates.

Extended Definition
The actual tip credit is the difference between what the employee is paid and the federal (or state required) minimum wage. As of July 2009, the federal minimum wage is $7.25 USD per hour. The federal minimum wage for tipped employees is $2.13 per hour. The difference between the two, the actual “tip credit” is $5.12 per hour. Tipped workers typically include those in the hospitality and restaurant industries.

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Tip Credit and Small Business Payroll