Federal law lets an employer pay a cash wage as low as $2.13 an hour and count up to $5.12 of your tips toward the $7.25 minimum. That is the tip credit, and the employer must make up any shortfall in any week where cash wages plus tips fall below the full minimum. Eight states — Alaska, California, Hawaii, Minnesota, Montana, Nevada, Oregon and Washington — allow no credit at all, so tipped workers there receive the full state minimum before a single tip.
The arithmetic behind the number everybody has heard
The federal cash wage for tipped employees is $2.13 an hour, a figure that has been unchanged for so long that it now looks like a typo to anybody encountering it for the first time. It is lawful because of a mechanism rather than an exception: the employer may claim a credit of up to $5.12 against the minimum wage, counting your tips toward that portion. Add $2.13 and $5.12 and you get exactly $7.25, which is the federal minimum.
Understanding it as a credit rather than as a separate wage explains everything else about how it works. The employee is entitled to the full minimum; the employer is simply allowed to satisfy part of that obligation with money customers provided rather than money the business provided. If the customers do not provide enough in a given week, the obligation does not shrink — it falls back on the employer.
That last point is the one most often misunderstood on both sides of the counter. A slow week does not mean a low-paid week, at least not lawfully. It means the employer owes you the difference for that week.
What the employer must do to claim it
The credit is not automatic and it comes with conditions. The employer has to inform you in advance that it is being taken, including the cash wage being paid, the amount of the credit claimed, and that all tips you receive are yours except for a valid tip pool. Failing to give that notice can invalidate the credit entirely, which means the full minimum was owed in cash for the whole period.
The employer must also let you keep your tips. Managers and supervisors cannot participate in a tip pool, and an employer taking a share of tips is a straightforward violation rather than a grey area. Where a valid tip pool operates among employees who customarily receive tips, that is permitted; where it reaches people who do not, or reaches management, it is not.
And the make-up obligation is calculated weekly rather than per shift. If cash wages plus tips across the workweek come to less than the minimum for the hours worked, the employer pays the shortfall. This is a per-week calculation rather than a per-shift one, so a dreadful Tuesday can be offset by a strong Friday within the same week and cannot be offset by last week.
The eight states with no credit at all
Alaska, California, Hawaii, Minnesota, Montana, Nevada, Oregon and Washington do not permit a tip credit. In those states a tipped worker receives the full state minimum wage as a cash wage, and tips sit entirely on top of it. Since several of those states also have high minimums, the practical difference for a server between one of them and a federal-credit state is very large.
A further group of states permit a credit but cap it well below the federal $5.12, producing a cash wage higher than $2.13 without going all the way to the full minimum. The result is a three-way split rather than a binary — no credit, capped credit, full federal credit. Where your state sits in that split is the single biggest determinant of what a tipped job pays before any customer has been considered at all. It matters more than the restaurant, the shift or the neighborhood.
Where it goes wrong in practice
The most common failure is not a refusal to pay the make-up but an absence of anybody calculating it. If the payroll system records tips as reported and the cash wage as fixed, and nothing compares the total against the minimum for the hours worked, a shortfall week simply passes through unnoticed. Nobody decided to underpay; the arithmetic was never done.
The second common failure is the dual jobs problem. When a tipped employee spends part of a shift on work that does not produce tips — cleaning, prep, stocking — there are limits on how much of that side work the credit can cover. The rules here have been rewritten more than once in recent years and are worth checking against current guidance rather than remembered practice, but the principle is stable: a tipped wage is for tipped work.
The third is the invalid tip pool, and it is usually a management participation problem rather than a dispute about who among the staff should share. A shift supervisor who also serves tables occupies genuinely contested ground, and reasonable people disagree about where that line sits. A general manager taking a cut does not occupy contested ground at all. If you are unsure which situation you are in, the question is whether that person exercises supervisory authority rather than what their badge says.
How to check your own
Take one week. Add your cash wages and your tips for that week, divide by the hours you worked, and compare the result with the applicable minimum where you work — which may be a state or city figure rather than the federal one. If the result is below it, the employer owed you the difference for that week.
Do this for three or four weeks before raising anything, because a single week can look wrong for reasons that resolve themselves on the next stub. Tip reporting timing and pay period boundaries both produce apparent gaps that are not gaps. A pattern across several weeks is a specific question with dates attached, which is a far better conversation to have than a general sense that the money seems short.
Why the federal cash wage has not moved
The $2.13 figure has been fixed since 1991. That is considerably longer than the $7.25 minimum has been fixed, and long enough that the balance between the two parts has inverted. When the cash wage was set it represented half the minimum wage; today it is 29 percent of it, with the credit carrying the other 71. The employee’s entitlement has not changed at all — what has changed is how much of it customers are expected to fund.
That drift is the reason tipped pay has become a live political question rather than a technical one, and it is why the eight no-credit states and the partial-credit states matter so much to the arithmetic. It also explains why several cities have legislated on tipped wages specifically even where their state has not. Whatever view you take of the policy, the practical point for a reader is that the gap between the best and worst jurisdictions for tipped work is now enormous, and it is entirely a question of where you stand rather than what you do.
Tax is a separate question
All tips are taxable income, including cash handed to you directly across a counter, and employees are required to report them to the employer. That obligation exists entirely independently of the tip credit and is unaffected by whether your employer claims one. It applies in the eight no-credit states exactly as it applies everywhere else, which surprises people who assume the two rules are connected.
It is worth separating the two in your own head because they pull in different directions. Under-reporting cash tips reduces tax today and also reduces the recorded earnings used for Social Security credits, unemployment benefit calculations and any loan application that asks for income. The tip credit is about what your employer owes you; reporting is about what is recorded as having been earned, and the second one follows you further.
This is general information about how the mechanism works rather than tax or legal advice about your situation. State rules on credits, side work and tip pooling differ substantially and are amended often, so your state labor agency is the place to confirm anything that matters — they will answer a question without any obligation to file a complaint.
Common questions
How does the tip credit work?
The employer pays a cash wage as low as $2.13 and counts up to $5.12 of your tips toward the $7.25 federal minimum. The two figures add to exactly the minimum.
What if tips fall short in a week?
The employer must make up the difference. The entitlement is to the full minimum; the credit only lets the employer satisfy part of it with customers' money.
What must the employer do to claim the credit?
Tell you in advance that it is being taken, the cash wage, the credit amount, and that your tips are yours apart from a valid pool. Failing to give notice can invalidate the credit entirely.
Can managers share in tips?
No. Managers and supervisors cannot participate in a tip pool, and an employer taking a share of tips is a straightforward violation rather than a grey area.
Which states allow no tip credit?
Alaska, California, Hawaii, Minnesota, Montana, Nevada, Oregon and Washington. Tipped workers there receive the full state minimum as cash, with tips on top.
Is the make-up calculated per shift?
Per workweek. A poor Tuesday can be offset by a strong Friday in the same week, and cannot be offset by a previous week.
What about side work?
There are limits on how much non-tipped work the credit can cover. The rules have been rewritten more than once recently, so check current guidance — but the principle holds: a tipped wage is for tipped work.
How do I check my own pay?
Add cash wages and tips for one week, divide by hours worked, compare to the applicable minimum where you work. Do it across three or four weeks before raising anything.