What is the maximum tip credit allowed for tipped employees?

The maximum tip credit allowed for tipped employees can vary based on federal and state regulations, but under federal law, as of 2023, the maximum tip credit allowed is $5.12 per hour. This amount is intended to help employers offset the minimum wage they must pay to tipped employees, who can be paid a reduced cash wage as long as the combination of that wage and tips meets or exceeds the federal minimum wage of $7.25 per hour.

Employers are responsible for ensuring that tipped employees receive at least the Federal minimum wage when tips are included. If a tipped employee does not earn enough in tips to reach the minimum wage, the employer must make up the difference. Therefore, the $5.12 tip credit represents a specific balance that has been established federally, which helps in maintaining fair labor practices while allowing for flexibility within the tipping service industry.

Understanding this maximum tip credit is vital for payroll professionals to ensure compliance with wage laws and to properly calculate wages for tipped employees.