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Paying Tipped Employees

By Catherine Gordon, JD | June 29, 2012

On July 24, 2009, The Fair Minimum Wage Act of 2007 raised the federal minimum wage rate to $7.25 per hour. This increase in the federal minimum wage impacted the state minimum wage rates of numerous states as well, because many states have enacted laws that tie the state minimum wage to the federal minimum wage rate. For employers with tipped employees, the change in the federal minimum wage requires compliance with an additional component to meet legal requirements regarding the minimum wage.

If you employ tipped employees, defined as employees who regularly and customarily receive over $30 a month in tips, these employees are subject to a different minimum wage, and federal law allows you, within limits, to take a tip credit against the current federal minimum hourly wage rate. Basically, this means that you can presume that your tipped employees are receiving a certain level of tips each pay period, and you can reduce their cash pay accordingly. Let's look at what this means in dollars and cents.

Although the minimum wage was raised to $7.25 per hour effective July 24, 2009, the minimum wage for tipped employees is still $2.13 per hour - no change. The minimum wage amount of $2.13 is derived by calculating 50 percent of a previous basic minimum wage of $4.25. What does change is the amount of the tip credit allowed by federal law for employers. As an employer of a tipped employee, you can take a tip credit of up to $5.12 per hour. The tip credit is calculated by simply subtracting the minimum wage for tipped employees ($2.13) from the current federal minimum wage ($7.25).

The special rules for paying tipped employees require that the employee must actually be receiving $5.12 in tips per hour before you can get the credit - the credit can't exceed the value of the tips received. You must also notify the employee that you're taking the credit and you may not keep any of the tips received - all of the tips received by the employee must be kept by the employee.

Employers with tipped employees must also comply with their state law in this area. A change in the federal minimum wage rate may result in a change in a state's minimum wage rate, which has an effect on the state minimum wage and tip credit per hour for tipped employees. It's important to be aware of any changes in the rules for paying tipped employees in your state due to the increase in the federal minimum wage. Once you check your state's law, keep in mind that where the state law doesn't mirror the federal law, the rule is that, if the federal minimum wage minus the federal tip credit is lower than your state's minimum wage minus your state's tip credit (if any), you must pay your employees the higher amount.

We know that for many employers with tipped employees summer can be a particularly busy time. Take a moment to make sure that you're paying your tipped employees correctly so that you don't run afoul of federal or state minimum wage laws.

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