The Roller Coaster Ride Surrounding the Tip Credit

Restaurant patrons customarily tip, which is why restaurants often pay tip-eligible employees less than the federally mandated minimum hourly wage, currently $7.25.

How tips are handled is one of the more complex areas of restaurant compliance, and restaurants face unique challenges as a result. Restaurants are required by law to pay taxes on tips employees receive because they are defined as income under the Federal Insurance Contributions Act (FICA). The Fair Labor Standards Act (FLSA), however, allows restaurants to take a “tip credit,” which is what allows them to pay eligible less than the federally mandated minimum. With the tip credit, an employer can pay tipped employees less than $7.25 and use the tips to cover the difference.

A clear understanding of the rules surrounding the tip credit is crucial for restaurant employers because the consequences of violating them are dire. Restaurants that do not follow the tip credit rules lose the tip credit and must pay the affected…