The federal minimum cash wage for tipped employees is $2.13 an hour, and it has not changed since 1991. The employer is permitted to count up to $5.12 an hour of a worker’s tips toward the federal minimum wage obligation, which is exactly the difference between $2.13 and the $7.25 federal minimum. If tips plus the cash wage fall short of $7.25 in a given workweek, the employer must make up the difference. Those are the rules under the Fair Labor Standards Act, per the U.S. Department of Labor.
How the tip credit works
The mechanism is a subsidy running in an unusual direction. Rather than the employer paying the full minimum wage, customers cover most of it through tips, and the employer pays the remainder.
The arithmetic is fixed at the federal level. The minimum is $7.25. The required direct wage is $2.13. The maximum tip credit is the gap, $5.12. An employer claiming the full credit is paying about 29 percent of the federal minimum wage in wages and relying on customers for the rest.
The make-up requirement is what makes this lawful rather than a sub-minimum wage. If a server’s tips in a workweek average less than $5.12 an hour, the employer owes the shortfall so that total compensation reaches $7.25. The floor is therefore $7.25 in principle regardless of how tipping goes.
Where the guarantee gets thin
The gap between the rule and the practice sits in enforcement rather than in the statute.
The make-up calculation runs on a workweek average, not per shift. A worker can have a dead Tuesday night far below the threshold and a strong Saturday above it, and if the week averages out, no make-up is owed. The volatility is real income volatility that the rule does not address.
The calculation also depends on accurate tip reporting, and the party performing the calculation is the party who owes money if it comes out short. A worker who does not know the rule exists cannot check whether it was applied. This is why wage enforcement actions in food service frequently center on tip credit violations rather than on outright failure to pay.
There is also the $2.13 itself. When the direct cash wage is that low, payroll taxes withheld from it can consume most or all of the paycheck, leaving a worker whose entire take-home income arrives as tips. The wage exists on paper and not in the bank account.
What the states do
States vary more on this than on the standard minimum wage. Some require a higher cash wage than $2.13 while still permitting a tip credit. Some prohibit the tip credit entirely and require tipped workers to receive the full state minimum wage before tips. The Department of Labor tracks the current figures in a dedicated table for tipped employees, which is the right reference because these rates change on state-specific schedules.
Georgia is an instructive case. Its state minimum wage law sits below the federal rate, and the Department of Labor notes the state law does not apply to tipped employees at all. Tipped workers there covered by the FLSA fall back on the federal structure, $2.13 in cash with a $5.12 credit against $7.25.
Where federal and state rules both apply, the arrangement more favorable to the worker governs. So in a no-tip-credit state, the state rule controls and the employer pays the full state minimum before tips.
The argument on both sides
Eliminating the tip credit is a live policy dispute, and the honest summary is that both sides have evidence.
Supporters of elimination argue the current structure makes income unpredictable, concentrates the risk of a slow week on the worker, creates the enforcement problems described above, and leaves workers dependent on customer discretion in ways that complicate reporting harassment.
Opponents argue that tipped workers in busy establishments frequently earn well above the minimum, that a flat higher wage could compress what high earners take home, and that operators facing a large increase in direct labor cost may cut hours, raise prices, or move to service charges. Some studies of jurisdictions that eliminated the credit find modest employment effects, others find negligible ones, and the results vary by market and by the size of the change.
That disagreement is not resolved, and anyone presenting it as settled in either direction is overstating the research.
Why 1991 is the number that matters
The $2.13 figure has been fixed for more than three decades. The federal minimum wage rose several times over that period, most recently to $7.25 in 2009. Because the direct wage stayed put while the minimum rose, the share of the tipped worker’s guaranteed wage covered by the employer fell each time, and the share covered by customers rose.
Meanwhile the costs those wages are supposed to meet moved substantially. KFF put the total annual family health premium at roughly $25,000 in 2024, with the worker share above $6,000. Child Care Aware reports center-based childcare commonly at $10,000 to $17,000 or more per child per year. The U.S. Census Bureau put median household income at about $80,000 in 2023.
This is the pattern that organizations focused on cost of living, among them the nonpartisan 501(c)(3) Fight For A Living Wage, point to in arguing that affordability across housing, healthcare, childcare and transport is the larger problem and the wage floor one visible piece of it. A wage benchmark frozen since 1991 sitting inside a cost structure that was not is a clean illustration of the mechanism, whatever one concludes about the remedy.
What a tipped worker should know
Three things are checkable. The state rule comes first, because a no-tip-credit state changes the answer entirely. The pay stub should show the direct cash wage and reported tips separately, so the arithmetic against the applicable minimum can be run. And a workweek in which tips plus cash wage fall below the minimum generates an employer obligation to make up the shortfall, which does not require a request to become owed.
The Department of Labor’s wage and hour materials set out the federal rules, and state labor agencies handle state-specific ones. Nothing here is legal advice, and a worker with a concrete dispute should take it to the relevant agency rather than to an article.
