Tip credit

Under the federal Fair Labor Standards Act, an employer may pay a tipped employee a lower cash wage and count part of the employee's tips toward the minimum wage. This is the tip credit. If wages plus tips fall short of the full minimum wage, the employer must make up the difference. Several states do not allow a tip credit at all, and others set their own tipped wage. Mandatory service charges on banquet invoices are generally not tips under IRS rules, and are treated as wages when distributed to staff.