How to handle FLSA tip credit

If you run a business that deals with tips as part of your payroll process, you’ve probably heard some rumblings about FLSA tip credit. But what exactly does it mean? How is it different from FICA tip credit? And how do you handle it as a manager or business owner? In this post, we’ll dive into these topics and more so you can master FLSA tip credit. 

What is FLSA tip credit?

The FLSA is a federal organization that determines federal minimum wages. FLSA tip credit refers to the difference between the minimum cash wage and the total minimum wage. 

Tipped employees in some areas may make a lower hourly wage (their cash wage), then receive tips that count towards meeting minimum wage requirements. Basically, if your business is taking this tip credit, you are using employees’ tips to make up the difference between the cash wage you offer and the total minimum wage. 

The reason that this tip credit is sometimes referred to as “FLSA tip credit” is to differentiate it from FICA tip credit, which is a completely separate tax credit related to tipped employees. 

Federal minimum wage and tipped minimum wage

The FLSA sets out minimum wage requirements at the federal level. In 2021 the federal minimum wage stands at $7.25/hour, while the minimum cash wage stands at $2.13/hour. This means that the federal maximum tip credit is $5.12/hour. 

State minimum wage rules

States, and even cities, are allowed to set their own minimum wage rules. So while the federal minimum wage may be $7.25/hour, many areas have a higher minimum wage because of local laws. Some states also have their own tip credit laws.

For example, 16 states follow the federal minimum cash wage ($2.13/hour), while the rest have higher cash wage requirements. Some states, like California, don’t recognize any tip credit at all because their cash wage and their minimum wage are the same.

You can check out this table of minimum hourly wages for tipped employees to find out what the laws are in your area. 

How to handle tip credit

Before you dive in on calculations, it is important to make sure that you can take the tip credit in your area. As discussed above, some states have higher cash minimum wages, some states have higher total minimum wages, and some states don’t allow tip credit altogether.

It’s a good idea to double-check the rules in your area so your business can stay compliant. You should also know that tip credit understandably only applies to tipped employees, which are defined by the FLSA as someone who “customarily and regularly receives more than $30 per month in tips.”

Once you’re sure your business can take the tip credit, it’s just a matter of notifying your employees and keeping track of cash wages and tips to ensure that they meet the minimum wage in your area. It’s important to tell your employees what their cash wage will be and what the combined minimum wage is.

If they don’t meet the combined minimum wage with their tips, then it is up to you to compensate them so they make the minimum wage.

Need help making payroll painless? Homebase Payroll instantly converts your timesheets into hours and wages and sends the correct payments to employees, the state, and the IRS. This way you can avoid mistakes and finish the job fast.

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