Which of the following statements about the tip credit is correct?

The statement regarding the tip credit being set at the federal level is accurate in that there is a specified federal tip credit amount established under the Fair Labor Standards Act (FLSA). This federal standard allows employers to pay tipped employees a lower minimum wage, provided that the tips they receive make up the difference between their earnings and the federal minimum wage. As of 2023, the federal tip credit is set at a specific dollar amount that employers can count towards paying their employees, which supports the premise of providing a more flexible wage structure for employers in the service industry.

Employers must ensure that the total earnings—including wages and tips—meet or exceed the federal minimum wage. However, the federal tip credit does not preclude states or municipalities from establishing their own regulations that may provide a higher tip credit or an entirely different structure for tip treatment, which can lead to variations in the tip credit application at those levels.

The incorrect answers relate to misunderstandings of the tip credit’s application and limitations. The tip credit isn't dependent solely on total earnings, as it must balance with the minimum wage requirements; the tip credit cannot exceed the actual minimum wage, and higher percentages do not apply universally across industries without specific local regulations.