Income & Work

What Is a Tip Credit?

A tip credit is a provision in US wage law that allows employers to pay tipped employees a cash wage below the regular minimum wage, counting part of the employees' tips toward the minimum. If tips plus the cash wage do not reach the full minimum wage, the employer must make up the difference. Some states do not allow a tip credit.

How It Works

Tip credit = full minimum wage − cash wage paid. The credit taken cannot exceed the tips the employee actually receives.

Example

If the applicable minimum wage is 10.00 and the employer pays a cash wage of 5.00, the tip credit is 5.00 per hour. An employee who works 30 hours must receive at least 150 in tips for the week; otherwise the employer pays the shortfall.

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🔗 Related Terms

Minimum Wage Gratuity Tip Pooling Hourly Wage

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Last updated: September 27, 2026. This definition is for general educational purposes only. It is not financial, investment, tax, legal, or medical advice, and it does not recommend any product or course of action. For decisions about your own situation, consult a qualified professional.