How the Tip Credit Works
Federal law allows employers to pay tipped workers as little as $2.13/hr if the combination of base wage and tips equals at least $7.25/hr (federal minimum). If tips don’t bring you to $7.25, the employer must make up the difference. Many states have eliminated the tipped minimum wage entirely, requiring full minimum wage as the base rate for tipped employees.
State tipped minimum wage policies
| State Policy | Examples | Tipped Min. Wage |
|---|---|---|
| Federal tipped minimum | TX, GA, OH, SC | $2.13–$4.00/hr base |
| Higher tipped minimum | FL ($9.98), CO ($11.40), IL ($7.80) | Higher than federal |
| Full minimum wage | CA, WA, OR, MN, NV, AK | $16–$17.28/hr base |
Calculating Effective Hourly Rate with Tips
Track your total weekly earnings (base + tips) and divide by hours worked to find your true effective hourly rate. A server working 35 hours/week and earning $1,400 total (including $1,330 in tips on a $3/hr base) earns an effective $40/hr — very different from the base wage number.
All tip income is subject to federal and state income taxes plus FICA. Many tipped workers under-report cash tips, creating risk of IRS audit and back taxes. Report accurately — and track your tips daily to ensure your employer’s withholding is adequate.
Annual Income Estimation for Tipped Workers
For budgeting and loan applications, tipped workers should track tips over 12 weeks, calculate the average weekly total (wages + tips), then multiply by 50 (using 50 instead of 52 to account for lower-earning weeks). This provides a conservative annual income estimate.
Calculate Your Total Annual Income with Tips
Enter your base wage and average weekly tip income to find your real annual earnings.