The tip credit explained: tipped minimum wage and the FICA tip credit

Your accountant mentions "the tip credit" and you nod, while thinking about the $2.13 on your servers' pay stubs. They may mean something else entirely: the same name covers two different rules.

The tip credit means two things. The FLSA tip credit lets an employer pay a tipped employee as little as $2.13 an hour in cash and count up to $5.12 an hour of their tips toward the $7.25 federal minimum wage. The FICA tip credit is a federal income tax credit that gives food and beverage employers back the 7.65% Social Security and Medicare tax they paid on most tips. Last checked: 4 November 2026.

What is a tip credit? The two kinds side by side

You can use both, either or neither. A California restaurant cannot take the FLSA tip credit under state law, but it can still claim the FICA tip credit on every reported tip.

How does the FLSA tip credit work?

The rules are in DOL Fact Sheet 15:

• Who counts as tipped: an employee who customarily and regularly receives more than $30 a month in tips.
• Cash wage: at least $2.13 an hour.
• Maximum credit: $5.12 an hour, the gap between $2.13 and the $7.25 federal minimum.
• Tips must cover the gap. If cash wage plus tips falls short of $7.25 an hour in a workweek, you pay the difference.
• All tips stay with the employee, except through a valid tip pool. You can never keep any of them.
• Card fees: you may deduct the card company's percentage fee from a card tip, but no more than the actual fee, and never so that pay falls below minimum wage.

You must tell staff first. Without notice, there is no credit. Fact Sheet 15 says the notice, oral or written, must cover:

TIP CREDIT NOTICE: what to tell each tipped employee before you take it

1. The cash wage you will pay: $____ an hour (at least $2.13).
2. The tip credit you will claim: $____ an hour (not more than $5.12).
3. The tip credit cannot be more than the tips you actually receive.
4. You keep all your tips, except what you share in a valid tip pool
   limited to employees who customarily and regularly receive tips.
5. The tip credit does not apply to any employee who has not been
   told about these rules.

Employee signature: ____________   Date: ________

A signature is not required by the FLSA, but it is the easiest proof you gave notice. Some states ask for more: North Carolina, for example, requires a signed tip certification each month or pay period, according to the DOL's state table.

Overtime is calculated on the full minimum wage, not the cash wage. The credit cannot be bigger in overtime hours than in straight time.

A tip pool limits who can share. If you take the credit, only employees who customarily and regularly receive tips may be in the pool. Our tip pooling guide covers who can join.

Worked example: a week at $2.13

A server in a state that follows the federal rates works 45 hours in a week.

The overtime rate is 1.5 × $7.25 = $10.875, less the same $5.12 credit, so $5.755 cash per overtime hour. The server's tips that week must be at least $230.40 for you to take the full credit.

Now a slow week. A different server works 20 hours and receives $60 in tips.

• Owed at full minimum: 20 × $7.25 = $145.00.
• Cash wage paid: 20 × $2.13 = $42.60.
• Cash plus tips: $42.60 + $60.00 = $102.60.
• You top up $42.40.

The check is weekly, so a strong Saturday does not cover a short Tuesday in a different workweek. Plan overtime when you build the schedule, not after: our guide to restaurant scheduling laws covers the rest.

What changed with the 80/20 rule in 2026?

For years, owners were told that a tipped employee could spend no more than 20% of their time on side work, such as rolling silverware or restocking, before losing the tip credit for that time. That federal guidance is now gone.

• In August 2024 the Fifth Circuit, in Restaurant Law Center v. DOL (120 F.4th 163), struck down the 2021 rule that set the 20% and 30-minute limits.
• The DOL restored the older 1967 regulation and, in January 2025, removed the 80/20 guidance from its Field Operations Handbook.
• On 19 October 2026, Field Assistance Bulletin 2026-1, signed by Wage and Hour Administrator Andrew B. Rogers, withdrew three old opinion letters (from 1979, 1980 and 1985) and confirmed that the 80/20 guidance "no longer reflects the Division's policy".

The federal test now asks whether the employee works in a tipped occupation, not how many minutes they spend on each task. Related side work does not cost you the credit. A genuinely separate non-tipped job still does: the regulation's example is a hotel worker who is both a waiter and a maintenance worker. No credit is allowed for the maintenance hours.

State law can still be stricter. New York's Department of Labor bars the credit on any day a tipped worker spends more than two hours, or more than 20% of the shift, on non-tipped work. Check with an adviser for your state.

Tip credit by state

States can set a higher cash wage or ban the credit. This table comes from the DOL's Minimum Wages for Tipped Employees by State page, last revised 1 July 2026. Cities, such as Chicago and Washington, D.C., can set their own rates.

Notes on the figures:

• Florida: the DOL page, dated 1 July, still shows $10.98. Florida's minimum rose to $15.00 on 30 September 2026 and the tip credit stays at $3.02, so the cash wage is now $11.98 (Lowndes law firm, 2 September 2026).
• New York: the food service figures come from the state Department of Labor, which says the minimum wage stays the same on 1 January 2027. Only hospitality employers may take the credit.
• Ohio: the $5.50 applies to employers with gross receipts of $405,000 or more. Smaller employers pay $7.25.

How does the FICA tip credit work?

Tips are wages for Social Security and Medicare, so you pay the 7.65% employer share on them. Section 45B gives most of that back as a credit, claimed on IRS Form 8846. The figures below are from the draft instructions (Rev. December 2026), dated 15 October 2026.

The rule has one catch. You cannot claim the credit on tips that were needed to bring the employee up to $5.15 an hour, the federal minimum wage on 1 January 2007. That baseline is frozen, so it has not risen with the $7.25 minimum.

To find creditable tips for each employee for each month:

1. Multiply hours worked by $5.15.
2. Subtract the wages you actually paid, not counting tips.
3. If the answer is above zero, subtract it from the month's reported tips.
4. Multiply the result by 7.65%.

The IRS example: an employee works 100 hours in a month at $3.75 an hour and receives $450 in tips.

• At $5.15 the wages would be $515. You paid $375. The gap is $140.
• Creditable tips: $450 minus $140 = $310.
• Credit: $310 × 7.65% = $23.72 for that employee for that month.

Other rules from the instructions:

• Where an employee's wages and tips go over the Social Security wage base ($184,500 for 2026), tips above it earn only 1.45%.
• You reduce your income tax deduction for employer FICA by the amount of the credit, so you cannot take both on the same dollars.
• The credit is part of the general business credit. Partnerships and S corporations must file Form 8846, and so does any other restaurant business claiming it. A partner or shareholder whose only source of the credit is a partnership or S corporation reports it directly on Form 3800.
• You can claim it, on an original or amended return, up to three years after the return's due date, so check your last three years.
• Service charges never count, because the credit applies only to tips. The instructions send you to IRS Rev. Rul. 2012-18 for the difference, and our guide is a service charge a tip? explains that test.

Worked example: claiming a month's FICA tip credit

Two full-time servers, 160 hours each in a month, $4,000 in tips each.

Wherever the cash wage is at least $5.15 an hour, every reported tip is creditable. In the state table above, that is every state except Georgia, North Carolina, Texas and Pennsylvania, where the cash wage is $2.13 or $2.83 and the reduction bites. If you are in a state with no tip credit, do not assume the FICA credit is not for you: it is often worth the most there.

The new "no tax on tips" deduction does not change any of this, because FICA still applies to tips. Our no tax on tips guide covers the 2026 W-2.

Owner checklist

1. Check your state's cash wage and whether it allows a tip credit at all.
2. Give every tipped employee the five-point notice before you take the credit.
3. Each workweek, check that cash wage plus tips reaches the full minimum, and top up any shortfall.
4. Calculate overtime on the full minimum, not the cash wage.
5. Keep tips by employee by month, separate from service charges.
6. Ask your accountant to claim the FICA tip credit on Form 8846, and to look back three years.

Can TablePort handle this for you?

Both credits start from two records: the tips your staff receive and the hours they work.

1. At close, cash, voids, comps and tips reconcile on one screen, and the daily report shows hours and tips per staff member.
2. Use the accounting exports to send daily sales, tips and tax to your accountant.
3. Turn on the Staff Management add-on's labor law presets for federal FLSA, California or New York to get overtime warnings as you build the schedule.
4. Use time tracking: staff clock in and out, so the hours behind each week's minimum wage check are recorded.

One honest limit: TablePort does not run payroll, calculate tip-credit top-ups or prepare Form 8846. Your payroll provider and accountant do. See the POS page.