How to Calculate Payroll for Tipped Employees (2026)
Updated April 2026 · 10 min read
What is a Tipped Employee? Source: DOL.gov
Under the Fair Labor Standards Act (FLSA), a tipped employee is someone who regularly receives more than $30 per month in tips. Common tipped occupations include:
- Servers and waitstaff
- Bartenders
- Bussers and food runners
- Valets and bellhops
- Hairdressers and nail technicians
- Delivery drivers
2026 Tipped Minimum Wage by State
Each state sets its own rules for tipped employees. Some states allow a tip credit (reduced cash wage), while others require full minimum wage plus tips:
| State | Cash Wage | Max Tip Credit | Effective Minimum |
|---|---|---|---|
| Federal | $2.13/hr | $5.12 | $7.25/hr |
| California | $16.50/hr | None | $16.50/hr |
| New York | $10.65/hr | $5.35 | $16.00/hr |
| Texas | $2.13/hr | $5.12 | $7.25/hr |
| Florida | $8.98/hr | $4.00 | $12.98/hr |
| Illinois | $8.40/hr | $5.60 | $14.00/hr |
| Washington | $16.66/hr | None | $16.66/hr |
| Nevada | $10.50/hr | $1.50 | $12.00/hr |
How the Tip Credit Works
The tip credit allows employers to pay tipped employees a lower cash wage, as long as the employee's tips bring their total pay to at least minimum wage. Here's the federal formula:
If tips fall short, the employer must make up the difference ("tip top-up")
Example: Server Working 30 Hours
- Cash wage: $2.13/hr × 30 hrs = $63.90
- Tips earned: $300
- Total compensation: $363.90 ÷ 30 hrs = $12.13/hr ✅ Above $7.25
- Employer tip credit used: $5.12/hr × 30 hrs = $153.60 saved
Weekly Payroll Examples for Tipped Servers
Here's how tips affect weekly and annual earnings (federal cash wage of $2.13/hr, 30 hrs/week):
| Weekly Tips | Base Pay | Total Gross | FICA (7.65%) | Annual Gross |
|---|---|---|---|---|
| $100.00 | $63.90 | $163.90 | $12.54 | $8,522.80 |
| $200.00 | $63.90 | $263.90 | $20.19 | $13,722.80 |
| $300.00 | $63.90 | $363.90 | $27.84 | $18,922.80 |
| $500.00 | $63.90 | $563.90 | $43.14 | $29,322.80 |
| $800.00 | $63.90 | $863.90 | $66.09 | $44,922.80 |
Tip Reporting Requirements Source: IRS.gov
Employee Obligations
- Report all tips to employer by the 10th of the following month
- Keep a daily tip log (Form 4070A)
- Report tips of $20+/month to employer
Employer Obligations
- Withhold FICA and income taxes on reported tips
- Pay employer's share of FICA (7.65%) on all reported tips
- Report to IRS if total tips < 8% of gross receipts (Form 8027)
- Can claim FICA Tip Credit (Form 8846) for employer taxes paid on tips above minimum wage
Overtime for Tipped Employees
Tipped employees are entitled to overtime (1.5x) after 40 hours. The overtime rate is calculated on the full minimum wage, not the reduced cash wage:
Cash wage during OT: $10.88 - $5.12 (tip credit) = $5.76/hr cash + tips