Tip Credit and the 80/20 Rule by State (2026)

The federal tip credit still lets many employers pay as little as $2.13 an hour in cash — but only if tips close the gap to the full minimum wage, and only in states that still allow the credit.

If you run a restaurant, bar, hotel, salon, or any business with tipped staff, the expensive mistakes are rarely abstract doctrine. They are operational: paying California servers $2.13 because “federal allows it,” skipping the weekly make-up when tips are light, putting a cook in a tip pool while taking a tip credit, or still staffing to a 20% side-work stopwatch that federal regulation no longer enforces.

This is the employer version. Full statutes, the complete state table, and case citations live in our tipped wage and tip credit research. For the income-tax headline that confuses payroll questions, see what “no tax on tips” actually means — that is a Form 1040 deduction, not a cash-wage rule.

Tip-credit posture by state (DOL tipped-wage table, July 1, 2026). Hover a state for the category. Uncolored states generally allow a tip credit at the federal-style cash floor; always confirm local ordinances and special hospitality rates.

Tip credit prohibited (full cash MW)Tip credit allowed · cash floor above $2.13Tip credit allowed · federal-style cash floor (typical)

The short version

Federal cash floor: $2.13/hour when a tip credit is taken; maximum federal tip credit $5.12 against the $7.25 minimum wage.
Make-up: cash wages + tips for the workweek must reach the full minimum wage; you pay any shortfall.
Notice: five tip-credit disclosures before the credit applies; missing notice can forfeit the credit.
80/20/30 Final Rule: vacated in 2024. Federal enforcement follows restored dual-jobs rules, not a 20% / 30-minute side-work stopwatch. Residual litigation risk can still exist outside the Fifth Circuit; some states keep their own side-work rules.
Seven no-tip-credit states: Alaska, California, Minnesota, Montana, Nevada, Oregon, Washington — full cash state minimum wage before tips.
Tip pools: traditional pools (tip credit taken) stay limited to customarily tipped jobs; nontraditional pools may include back-of-house only if everyone gets full cash minimum wage and you take no tip credit. Managers and the employer never keep employee tips.
Tax ≠ wage: “No tax on tips” does not lower the cash wage you owe.

The mistakes that cost real money

1. Taking a tip credit without the required notice

No notice, no tip credit. Before you claim it, you need to tell the employee the cash wage, the tip-credit amount, that the credit cannot exceed tips actually received, that tips belong to the employee except for a valid pool, and that the credit does not apply unless they have been informed. Oral notice can work federally. Missing it can mean you retroactively owe the full minimum wage on those hours.

2. Ignoring the weekly make-up when tips are light

A slow Tuesday does not stretch the rule across the month. If cash + tips for the workweek fall short of the full minimum wage, write the make-up on the regular payday.

3. Still running the 80/20/30 stopwatch as if it were current federal regulation

From late 2021 until the Fifth Circuit vacated it, the Dual Jobs Final Rule limited tip credit for “directly supporting” side work above 20% of the workweek or 30 continuous minutes. That rule is vacated. DOL restored the older dual-jobs regulation text. What remains is the dual-jobs idea: tip credit for hours in a tipped occupation, not for a separate non-tipped job — not a universal 80/20 minute ledger for every roll of silverware. Some older court decisions and some state agencies still use percentage-style side-work tests; treat those as residual risk, not as the vacated federal Final Rule.

4. Putting cooks, dishwashers, or managers in a tip-credit pool

Traditional pool + tip credit: customarily tipped occupations only. Nontraditional pool: full cash minimum wage, no tip credit, back-of-house may share. Managers and supervisors may not keep other employees’ tips either way.

5. Using the tip credit in a no-tip-credit state

In the seven full-cash states, tips sit on top of the full state minimum wage. Importing a $2.13 federal cash rate into a California or Washington POS is an immediate underpayment.

6. Calculating overtime on the $2.13 cash rate

When you take a tip credit, overtime premium is computed from the full minimum wage (or a higher regular rate), not from $2.13. You also cannot claim a larger tip credit on an overtime hour than on a straight-time hour.

How the federal tip credit works

A tipped employee is someone in an occupation that customarily and regularly receives more than $30 a month in tips. The employer may pay a cash wage of at least $2.13 and count tips toward the rest of the $7.25 federal minimum, up to $5.12 per hour.

Only tips actually received count. Automatic service charges and banquet fees are usually wages, not tips. Credit-card processing fees may be deducted from tips under federal law only if the employee still clears the full minimum wage for the week — and some states, including California, ban that fee deduction.

Records matter: who is tip-credited, tips reported, hours, and — when someone truly holds two occupations — tipped vs non-tipped hours.

For a worked cash-floor check, use the tip credit calculator embedded below (make-up and cash floor only — not 80/20 minute tracking).

Cash wage + tips vs full minimum wage for one workweek. Does not track 80/20 side-work minutes. Try the slow-week or California preset to see make-up and no-tip-credit behavior.

Try a scenario

Your inputs

State / jurisdiction

Rates from the DOL WHD tipped-wage table (July 1, 2026). No-tip-credit states set the cash floor equal to the full state minimum wage.

Cash wage paid ($/hour)

Jurisdiction cash floor: $2.13/hr · max tip credit $5.12/hr

Tips received this workweek ($)

Tips actually received (including valid pool shares). Service charges are not tips.

Hours worked this workweek

Optional for orientation — make-up is computed for this period. Default 40 hours.

Make-up owed

$0.00

Full MW obligation $290.00 − cash $85.20 − tips $250.00

Hourly breakdown

Cash wage paid: $2.13/hr
Tips per hour: $6.25/hr
Tip credit claimed (capped): $5.12/hr
Effective rate (cash + credit): $7.25/hr
Full minimum wage: $7.25/hr
Min cash wage: $2.13/hr

Federal (FLSA default) — note

Federal floor: $2.13 cash wage, $5.12 max tip credit against $7.25. Cash wages + tips must reach $7.25 each workweek; employer makes up any shortfall.

Estimates whether cash wages plus tips reach the full minimum wage for one workweek and whether the cash wage meets the jurisdiction cash floor. Does not track tip-producing vs supporting duties under the vacated 80/20/30 Final Rule, dual-job occupation splits, overtime premiums on the full minimum wage, tip-pool validity, or notice compliance. Confirm local ordinances and any occupation-specific rates before payroll changes. Read the full methodology →

What happened to the 80/20 rule

The 2021 rule

The Dual Jobs Final Rule tried to split work into tip-producing, directly supporting, and unrelated duties, then cut off tip credit when supporting work exceeded 20% of the workweek or 30 continuous minutes.

The vacatur

In 2024 the Fifth Circuit vacated that Final Rule as contrary to the FLSA and arbitrary and capricious (Restaurant Law Center v. U.S. Department of Labor). Vacatur undoes the rule as a regulation. DOL later restored the pre-2021 dual-jobs regulatory language.

What you should do now

Do not treat the 2021 20% / 30-minute stopwatch as current federal regulation.
Do still separate true dual occupations (maintenance worker who also serves tables vs server who rolls silverware as part of the same tipped job).
Check whether your state imposes its own side-work percentage (New Jersey is a common example of a state rule independent of the vacated federal Final Rule).
Expect plaintiff counsel outside the Fifth Circuit to cite older 80/20 case law in some disputes; that is residual litigation risk, not a reason to ignore the vacatur.

For a 60-second version, see when the 80/20 rule kicks in.

States that prohibit a tip credit

These seven require the full state minimum wage in cash before tips (DOL table, July 1, 2026):

State	Full cash minimum (illustrative)
Alaska	$14.00
California	$16.90 general (higher industry rates may apply)
Minnesota	$11.41
Montana	$10.85 standard / lower small-employer floor
Nevada	$12.00
Oregon	$15.55 standard / $16.80 Portland metro / $14.55 nonurban
Washington	$17.13

California is the national model for “one fair wage” hospitality pay: tips cannot reduce the employer’s cash minimum-wage duty, and credit-card fees may not come out of tips.

Quick list: which states prohibit tip credit.

Tip pooling in plain English

Setup	Who may share	Cash wage
Traditional pool	Customarily tipped jobs only (servers, bartenders, bussers, etc.)	Tip credit allowed if all other conditions met
Nontraditional pool	May include cooks, dishwashers, other non-tipped occupations	Full cash minimum wage; no tip credit
Either pool	Managers / supervisors / employer may not keep employee tips	—

There is no federal percentage cap on a valid pool contribution. Tips collected for redistribution should go out by the regular payday for the workweek (or as soon as practicable if amounts are not known at cut). A manager may keep only tips a customer gave directly for service the manager solely provided.

See how to pool tips legally.

State cash floors that still allow a tip credit

Most states allow a tip credit but raise the cash floor or cap the credit. A few patterns matter for payroll setup:

Federal-floor states (cash often $2.13): many southern and plains states follow the FLSA numbers when state law does not set a higher tipped cash wage.
Higher cash floors: Arizona ($12.15 cash against $15.15), Colorado ($12.14 / $15.16), Florida ($10.98 / $14.00, climbing toward $15.00 full MW on 9/30/2026), Massachusetts ($6.75 / $15.00), Illinois ($9.00 cash with a 40% tip-credit cap).
Large tip-credit exposure: Nebraska and Virginia keep a $2.13 cash floor against a much higher full state minimum wage — make-up risk is real on slow weeks.
Special structures: Connecticut (occupation-specific hotel/restaurant vs bartender rates), Hawaii (conditional tip credit only if employer wages + tips clear a “$7 above MW” test), New York (regional hospitality rates; NYC food-service cash $11.35 against $17.00 as of 1/1/2026), Michigan (cash wage phasing toward 50% of state MW by 2031), District of Columbia ($10.30 cash against $18.40 as of 7/1/2026).

Local ordinances can go higher. Confirm with the state labor department before changing rates. The full row-by-row table is in the research.

What to track every pay period

Work location → cash floor and whether tip credit is legal.
Occupation → tipped vs true dual-job non-tipped hours.
Hours → straight time and overtime (OT not on $2.13 alone).
Cash wages paid → at or above the jurisdiction cash floor.
Tips actually received (including pool shares) → weekly make-up test.
Notice evidence → the five federal elements (and any stricter state notice).
Pool roster → only eligible occupations for the pool type you run.

When any of those seven is missing, you cannot defend the tip credit.

Multi-state operators

Work location controls the cash floor. A Texas corporate payroll does not authorize a $2.13 California cash wage. If a server splits a week between Nevada (no tip credit) and Arizona (tip credit allowed), apply each day’s cash floor to hours worked in that state — do not average the cash wage.

If you discover you have been doing this wrong

Fix the next shift: raise cash wages, remove ineligible pool participants, issue missing notices.
Reconstruct the lookback (federal FLSA is generally 2 years, 3 if willful; state windows may be longer).
Compute back wages: lost tip-credit periods often mean full minimum wage (or state cash floor) minus cash actually paid, plus overtime recomputed on the correct rate.
Document the correction with tip reports and time records.
Fix the system: POS job codes, multi-state rate tables, pool rules, hire packets.

FAQ

Can I pay tipped employees only in tips?

No. Even with a tip credit, federal law still requires a cash wage of at least $2.13 per hour (or the higher state cash floor).

Do I still need to track side-work minutes after the 80/20 vacatur?

Not under the vacated 2021 Final Rule’s 20% / 30-minute stopwatch for federal compliance. You still need to recognize true dual occupations, and some states have their own side-work limits.

Can managers keep tips if they also wait tables?

Only tips a customer gave them directly for service they solely performed — not a share of other employees’ tips or pool proceeds.

Does “no tax on tips” let me reduce the cash wage?

No. That is an individual income-tax deduction. It does not change FLSA cash floors, FICA on tips, or tip-credit conditions. See no tax on tips.

What if my state cash floor is higher than $2.13 but still allows a tip credit?

Pay at least the state cash floor. The tip credit is the difference between that cash wage and the higher of federal or state full minimum wage, subject to any state percentage caps.

Are automatic gratuities tips?

Usually no. Compulsory service charges are not tips under federal rules. They can count as wages toward the minimum wage and belong in the regular rate for overtime.

The rule of thumb

Set the cash wage from the work location’s table, prove the weekly make-up, keep tip and pool records with the time punches, and treat the tax deduction for tips as a separate Form 1040 problem — not a reason to change the cash wage.

Common failure modes: no notice; no make-up on a slow week; back-of-house or managers in a tip-credit pool; $2.13 cash in a no-tip-credit state; overtime on the cash rate; side-work stopwatches that no longer match federal regulation — or dual-job blindness when one person truly holds two occupations.

Sources

Primary research and citations: Tipped wage and tip credit.