Last updated: October 2026
Tip Credit Rules for Restaurants in 2026
The tip credit holds only in a workweek where tips cover the gap. Under the Fair Labor Standards Act (FLSA), employers can count a portion of employee tips toward the minimum wage obligation, reducing the required cash wage to $2.13 per hour.
Why $2.13 Per Hour Is Not the Full Story
In 2026, the federal minimum wage is $7.25 and the maximum credit is $5.12 per hour. Every workweek, the employer must confirm that cash wages plus tips received equal or exceed the federal minimum wage. When tips fall short, the employer pays the gap.
Restaurants in states with higher base wages face a different calculation. California requires the full state minimum ($16.90 as of July 1, 2026) before any tips, which means the federal tip credit is irrelevant for operators there. Arizona sets its tipped minimum at $12.15 as of July 1, 2026, leaving a maximum credit of $3.00 per hour.
The tradeoff with the reduced cash wage: you save on base restaurant labor cost, but you accept full responsibility for monitoring and reconciling tips every workweek.
Calculating the Credit Each Workweek
Start with the employee’s total tips for the workweek. Compare combined earnings (cash wage plus tips) against minimum wage multiplied by hours worked. If the total falls short, you owe the difference.
An employee working 30 hours in a workweek at $2.13 cash wage plus $250 in tips earns $313.90 total. Divide by 30 hours and that is $10.46 per hour, well above the floor. The credit holds.
Change the scenario to $100 in tips and the total drops to $163.90, or $5.46 per hour. At the 2026 federal minimum wage, the restaurant owes $53.60 for that workweek.
Side Work Rules
A 2021 Department of Labor (DOL) rule required the full minimum wage whenever untipped support work exceeded 20 percent of a tipped worker’s workweek or 30 continuous minutes. A federal appeals court vacated it on October 29, 2024, and the DOL removed it from the regulation effective December 17, 2024, restoring the original dual jobs text.
That text treats cleaning and setting tables, toasting bread, making coffee and occasionally washing dishes or glasses as related duties of a server. Related duties in a tipped occupation need not produce tips themselves.
The Employer Tax Credit on Form 8846
The Federal Insurance Contributions Act (FICA) tip credit under Section 45B equals the employer share of social security and Medicare taxes paid on qualifying tips. The 2025 Form 8846 figures it at 7.65% of creditable tips.
Claim it on Internal Revenue Service (IRS) Form 8846, filed with your annual business tax return. Your payroll system must track tip reporting by employee for the calculation to work, which is one reason accurate records matter beyond simple wage compliance.
The catch: you cannot claim the credit on tips used to meet the federal minimum wage in effect on January 1, 2007. That rate was $5.15 an hour, not the 2026 rate of $7.25. If the cash wage is $5.15 an hour or more, no tips are excluded from the credit.
Seven States That Ban the Tip Credit
As of July 1, 2026, seven states prohibit the tip credit entirely: Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington. Employers in these states pay the full state minimum wage before tips. No reduced rate. No credit calculation.
Many other states set their own tipped minimum wage above $2.13 but still allow a partial credit. Connecticut requires $6.38 per hour for hotel and restaurant workers as of July 1, 2026. Each state’s gap between the tipped minimum and the regular minimum determines the credit amount.
As of July 2026, Hawaii allows a tip credit only when the employee’s combined wages and tips are at least $7.00 more than the state minimum wage.
Dual Jobs and Split-Rate Employees
A server who also works as a line cook at the same restaurant holds two jobs under one employer. The dual jobs rule requires the full minimum wage for all hours spent in the non-tipped position. Only hours worked in the tipped role qualify for the reduced cash wage.
Split shifts create the same problem. An employee who hosts from 11 a.m. to 2 p.m. (tipped) and preps food from 2 p.m. to 5 p.m. (non-tipped) needs two pay rates on the same day. Your payroll system must track the switch.
Before Your Next Payroll Run
Pull your last four weeks of payroll records and check three things.
First, verify that every tipped employee earned at least minimum wage in every workweek after combining cash wages and reported tips. Any workweek that falls short means you owe the difference. Know which of your workers are nonexempt before running those numbers, since salaried nonexempt overtime follows its own rules.
Second, check dual jobs. No tip credit can be taken for hours an employee works in a non-tipped occupation.
Third, ask your tax preparer about Form 8846.
Make sure you understand the difference between a service charge and a tip before your next reporting period. For a full breakdown of restaurant-specific payroll rules, start with our restaurant payroll guide.
Frequently asked questions
Does the tip credit apply when employees participate in tip pooling?
Yes. Employers can claim the credit on pooled tips as long as only eligible tipped employees participate in the pool. Back-of-house workers like cooks and dishwashers cannot be included in a mandatory tip pool under FLSA rules when the employer takes a tip credit. An employer that pays the full minimum wage and takes no tip credit can include them.
What is the difference between Form 8027 and Form 8846?
Form 8027 is the annual return on which a large food or beverage establishment reports its receipts and tips and figures allocated tips. Form 8846 claims the FICA tip credit on your business tax return. One is a reporting requirement; the other is a tax credit that saves you money.
Can salaried restaurant managers receive tips from a tip pool?
No. Under the FLSA, managers and supervisors cannot receive tips from a tip pool. A manager may keep only tips received directly from customers for service the manager directly and solely provides. An employer that requires tipped employees to share tips with a manager or supervisor may be required to return the tips and pay the full minimum wage.
This is not legal or financial advice. Consult a qualified professional for your specific situation.