The Restaurant Owner's Guide to Tip Credit & Tip Reporting

How federal tip credit works

Under the Fair Labor Standards Act (FLSA), employers can take a tip credit against the minimum wage for tipped employees — workers who customarily and regularly receive more than $30/month in tips.

The federal numbers: - Federal minimum wage: $7.25/hour - Minimum cash wage for tipped employees: $2.13/hour - Maximum tip credit: $5.12/hour (the difference)

The employer must ensure that the employee's cash wage plus tips equals at least $7.25/hour for every workweek. If tips fall short, the employer must make up the difference. This is not optional — it is a legal obligation that the DOL actively enforces.

Requirements to claim tip credit Before taking tip credit, you must: 1. **Inform each tipped employee** of the tip credit provisions — the cash wage you will pay, the tip credit amount, that the tip credit cannot exceed tips actually received, and that all tips are the property of the employee (except in a valid tip pool). 2. **Keep records** of tips reported by each employee. 3. **Make up any shortfall** if tips plus cash wage fall below minimum wage.

States with no tip credit

These states require employers to pay the full state minimum wage before tips:

• California — $16.00/hour (no tip credit)
• Oregon — $14.70/hour (no tip credit)
• Washington — $16.28/hour (no tip credit)
• Minnesota — $11.13/hour (no tip credit)
• Montana — $10.30/hour (no tip credit)
• Nevada — $12.00/hour (no tip credit)
• Alaska — $11.73/hour (no tip credit)

Several other states allow only a partial tip credit (smaller than the federal maximum), including New York, Arizona, Colorado, Hawaii, and Connecticut. Always check your state's current rates.

IRS tip reporting requirements

Employee obligations Employees must report all tips to their employer by the 10th of the following month if tips exceed $20 in any calendar month. This includes cash tips, credit card tips, and tips received from tip pools.

Employer obligations - **Withhold taxes** on reported tips (income tax, FICA, Medicare). - **Pay employer FICA** on reported tips. - **File Form 8027** (Employer's Annual Information Return of Tip Income) if you have 10+ employees and tipping is customary. This form reports total charged tips, total reported tips, and gross receipts. The IRS uses it to identify potential underreporting.

Allocated tips If total reported tips for your establishment are less than 8% of gross receipts, you must **allocate** the shortfall among tipped employees on their W-2s. This does not mean you pay the difference — it means you report it to the IRS so they can follow up with individual employees.

Tip pooling rules (2026)

Federal tip pooling rules were updated by the Consolidated Appropriations Act of 2018 and subsequent DOL rulemaking:

• If you take tip credit: Only traditionally tipped employees (servers, bartenders, bussers) can be in the tip pool. Back-of-house (cooks, dishwashers) cannot be included.
• If you pay full minimum wage (no tip credit): You may include back-of-house employees in the tip pool. This is a significant change that benefits kitchens.
• Managers and supervisors can never participate in a tip pool, regardless of tip credit status.
• Employers can never retain any portion of employee tips under any circumstances.

State tip pooling variations Some states have additional restrictions: - **California**: No tip credit, and employers cannot require tip pooling with back-of-house (though voluntary pooling is allowed). - **New York**: Tip pooling is permitted but managers are strictly excluded. The definition of "manager" is broader than in some other states.

Documentation you need

To stay compliant with tip credit and tip reporting:

1. Written tip credit notice — Given to each tipped employee at hire, signed and filed.
2. Tip reporting forms — Monthly tip reports from each employee.
3. Payroll records — Showing cash wages paid, tip credit taken, and total compensation per pay period.
4. Form 8027 preparation — Annual reconciliation of gross receipts vs reported tips.
5. Tip pooling policy — Written policy specifying who is included, the distribution formula, and that managers and employers are excluded.

What DocketPack provides

DocketPack generates a complete tip compliance documentation set including the written tip credit notice, employee tip reporting forms, a tip pooling policy customized to your state's rules, and record-keeping templates that satisfy both DOL and IRS requirements.