How to Manage the FLSA Tip Credit and Why It Matters

If you run a business that is appoints Workers in a tipped occupation, You’ve probably heard about some rumblings Fair Labor Standards Act (FLSA) Tip credit. but You may be wondering what it is, whether it’s legal in your state, and how it might change you Salary process

It may surprise you that the FLSA tip credit can help with payroll because it helps you keep on top of your labor costs. Because ongoing payroll isn’t always the most fun part of running a business. Between collecting timesheets and paying benefits, taxes and time off, the process can be overwhelming.

That’s why in this article, we’ll explore:

  • What is the FLSA tip credit?
  • Who is eligible for the FLSA tip credit?
  • Tip credit rules broken down by state
  • How to Calculate Tip Credit Step by Step

What is the FLSA tip credit?

The Fair Labor Standards Act (FLSA) tip credit is a system that allows businesses to employ tipped workers to use tips to meet their minimum wage obligations.. This means that – if certain states allow it – employers can pay less than workers complete Minimum wage, if they earn enough in tips to make up the difference. It is worth noting that the federal minimum wage in the United States is $7.25 per hour.

For example, in 2022, Illinois set its minimum wage $12 per hour. The state maximum tip credit is $4.80 This means employers only have to pay their workers $7.20 an hour, if they claim a tip credit and their staff members tip more than $4.80 an hour.

Many states – and even some cities – have their own minimum wage rates. In cases where the state minimum wage is higher than the federal minimum wage, Employers necessary for use high amount For example, the minimum wage in Colorado is $12.56 an hour, while that number is $14.25 in Massachusetts and $7.25 in North Dakota.

And if a staff member’s hourly average gratuities are less than their state’s maximum tip credit, meaning they don’t make enough in tips, the employer must compensate them for the difference and ensure they are paid the full total minimum wage amount.

Tip credit rules by state

Both States and some cities They are allowed to setr own tip credit law And Minimum wage rules. So, when federal The law stipulates a maximum tip credit of $5.12 per hour, There are many areas Different rates.

Some states don’t even recognize tip credits at all, requiring business owners to pay tipped workers the same minimum wage as non-tipped employees like dishwashers and bussers. These states and territories are:

  • Alaska
  • American Samoa
  • California
  • Commonwealth of Northern Mariana Islands
  • guam
  • Minnesota
  • montana
  • Nevada
  • Oregon
  • Washington

In several states, employers are required to pay their tipped workers a minimum cash wage that is above the federal FLSA rate, which is $2.13 an hour. That means the maximum tip credit may change as well.

For example, in Delaware, the maximum tip credit is $8.27 per hour and the minimum cash wage is $2.23. This total comes to $10.50. In Oklahoma, on the other hand, the state minimum wage is $7.25 and the maximum tip credit is $5.12, making the minimum cash wage $2.13.

check This table is out Minimum hourly wage for tipped workers to find Learn more about your specific state laws.

Once you are sure of your business eligible for tip credit, You should notify your employees orally or through written notice and keep track Cash wages and tips for sure you can meet Record keeping requirements.

Who is eligible for tip credit?

Employers can claim a tip credit for any employee who has a job where they regularly receive tips, such as:

  • Bartender
  • server
  • hair stylist
  • Nail Technicians
  • Baristas
  • Delivery driver

According to the US Department of Labor (DOL), a tipped worker is anyone who regularly and customarily receives at least $30 in tips per month. However, this number may vary between states.

For example, Workers in Vermont A position earning over $120 per month in tips that requires direct and personal customer service is considered a tipped employee. In North Carolina, that number is $20 per month. So always check the requirements in your state for residency request.

Additionally, tip credit can only be applied to tip-generating tasks or tasks that support it Supporting work does not take one “Enough time.” The DOL’s Dual Employment Final RuleThat amount defines the period, with an effective date of December 28, 2021:

  • More than 20% of an employee’s work week
  • A continuous duration 30 minutes

For a server, refilling salt and pepper shakers, setting and seating tables, rolling out silverware, and folding napkins are considered direct support tasks. However, you cannot claim a tip credit for non-tipped duties such as preparing meals or cleaning the bathroom, and workers must be compensated with the total minimum wage amount.

Want to learn more about the FLSA tip credit? Check out the DOL Tip regulation under the Fair Labor Standards Act (FLSA)..

How to Calculate Tip Credit Step by Step

Calculating tip credits for each of your employees and taking into account overtime and different taxes can be complicated. That’s where yours is Payroll software Automating the process can help reduce errors, but if you want to do the calculations manually, you can follow the steps below.

1. Collect records for your specific pay period

Time to collect is yours Timesheet And note the tip record for a specific pay period You are looking for total hours worked and total tips earned.

Let’s imagine your employee, Hannah, worked 40 hours last pay period and made a total of $600 in tips. Suppose your state’s maximum tip credit is $5.12, the minimum wage rate is $2.13, and the total minimum wage is $7.25.

2. Calculate your employee’s average tips per hour

Next, you need to calculate how much Hannah earns in tips on average to find out if the amount exceeds $5.12. Because if you come up with a low number, he couldn’t tip over the entire past pay period and you have to compensate him for the difference.

Follow the formula below:

This makes Hannah’s average tips $15 per hour during this pay period.

3. Compare your employee’s average tips per hour to your state’s maximum tip credit

Since Hannah’s $15 is more than $5.12, you are no longer under any obligation to pay her overtime and can claim the full tip credit in this instance. This means Hannah’s tip credit would be the full $5.12 and you would have to compensate her at $2.13 per hour plus tips.

But let’s say another employee, Samantha, earns only $200 in tips for the same 40 hours of work. His average tips per hour will be $5 ($200 40 hours = $5). In this case, since $5 is less than $5.12, you must pay Samantha overtime and you cannot claim the full $5.12 tip credit.

4. Calculate your tip credit

Hannah has made enough tips, which means you can claim the full $5.12 in tip credit. However, you still need to calculate Samantha’s tip credit to figure out how much you owe her for overtime. To do this, All you have to do is subtract the average tips per hour by the state’s maximum tip credit.

This makes Samantha’s tip credit $0.12 per hour.

One last tip from Homebase (credit)

The FLSA tip credit allows employers to count their employees’ tips toward their minimum wage obligations. And by using this practice, business owners can pay their team members less than the federal or state minimum wage as long as they can tip — or exceed — to make up the difference.

However, calculating tip credits manually is difficult. Especially when you have to consider multiple employees and locations, overtime rates, withholding taxes, and tip pooling arrangements.

That’s where having a dynamic pay system can help. Homebase Pay Instantly converts your timesheets into hours and wages and sends accurate payments to employees, states and them Internal Revenue Service (IRS). that By the way, you can Automate the process and reduce human error so you can stay compliant, keep accurate records and keep your employees happy.

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