Tipping Laws & Etiquette: Everything You Need to Know About Tipped Pay

Danika McClure
Everything You Need to Know About Tipped Pay
Reading Time: 9 minutes

Tipping is a confounding and hotly debated phenomenon in the United States, one which those who have worked in, or patronized a service industry are all too familiar with. What exactly are tips? Why did it become customary? What do employers and employees need to know about tips and taxes? What is tipping etiquette?

We explore that and much more below.

What Exactly Is a Tip, and Why Do We Do It?

Tips, otherwise known as gratuities, are sums of money given by a client or customer to a person working in a service industry. This gratuity gives the employee an additional wage above the hourly or salaried earnings for the task they perform.

While tipping is not usually mandatory, it is a polite and prevailing practice to leave a tip after meals at restaurants, at bars, coffee shops, tattoo parlors, hair salons, when utilizing ride-sharing services or valet parking, and a number of other service-based industries.

History of Tipping

The history of tipping is vast, and on the surface exists as a reward for polite, speedy, and effective service. But delving further, tipping has a surprisingly problematic history. In her book, “Forked: A New Standard for American Dining,” Saru Jayaraman, the co-founder and co-director of the Restaurant Opportunities Center United  and director of the Food Labor Research Center at the University of California, Berkeley, uncovers that the tip as we know it today is rooted in one of America’s most regrettable practices: slavery and racism.

The practice started in Europe, where aristocrats popularized the habit of slipping gratuities to their hosts’ servants, and by the mid-1800 the practice had spread to America.

“[In America], restaurants and rail operators embraced tipping primarily because it enabled them to save money by hiring newly freed slaves to work for tips alone,” Jayaraman told Mother Jones.

America’s first minimum wage law, The Fair Labor and Standards Act,  passed by congress in 1938, allowed states to set a lower wage for tipped workers, but it wasn’t until the late 1960’s that labor advocates convinced Congress to adopt a federal tipped minimum wage that would be adjusted in tandem with the minimum wage. In 1996 however, Herman Cain, who was then the head of the National Restaurant Association, helped convince the Republican-led Congress to decouple the two wages. Since then, the tipped minimum has remained at $2.13.

Tipping and the FLSA

America’s first minimum wage law, The Fair Labor and Standards Act,  passed by congress in 1938, allowed states to set a lower wage for tipped workers, but it wasn’t until the late 1960’s that labor advocates convinced Congress to adopt a federal tipped minimum wage that would be adjusted in tandem with the minimum wage. In 1996 however, Herman Cain, who was then the head of the National Restaurant Association, helped convince the Republican-led Congress to decouple the two wages. Since then, the tipped minimum has remained at $2.13.

An employer of a tipped employee is required to pay $2.13 per hour in direct wages if that amount combined with tips received equals the federally mandated minimum wage of $7.25 per hour. If tips do not amount to more than that amount, the employer is required to make up the difference.

Since the minimum wage varies by state and municipality, employers may be required to make up for wages based on their individual state laws. Seven states in the U.S. require employers to pay tipped employees full state minimum wage before tips, including California, Guam, Minnesota, Montana, Nevada, Oregon, and Washington.

Minimum Wage for Tipped Employees

Tipped employees, according to the Department of Labor, are those who customarily and regularly receive more than $30 per month in tips. The employer is prohibited from using tips for any reason other than as a credit against its minimum wage obligation to the employee.

As the Federal minimum wage law stands now, employers across the United States are required to pay at least $2.13 per hour.

In order for a business owner to pay the tipped minimum wage, it must provide the following information to employees:

  1. The amount of cash wage that the employer will be paying a tipped employee, which must be at least $2.13 per hour.
  2. The additional amount that the employer is submitting to the government in order to be eligible for a tip credit. This amount cannot exceed $5.12 per hour as the law currently stands.
  3. The tip credit claimed by the employer cannot exceed the amount of tips received by the employee.
  4. All tips received by the tipped employee are to be retained by the employee, unless certain circumstances are met.
  5. Tip credit will not apply to any tipped employee unless they have been made aware of the above items.

Employers must provide oral or written notice to employees in order to claim the 3(m) tip credit of the FLSA and will be required to pay employees $7.25 per hour and allow the tipped employee to keep all tips received.

Tip Credit

Under federal law and many state laws, employers are permitted to pay tipped employees less than the minimum wage, so long as employees receive enough in tips to make up the difference. This is referred to as a tip credit, because the employer counts the employee’s tips towards its obligation to pay the minimum wage. In essence, if you make less than $30 in tips per month, your employer will have to make up the difference in your pay.

If, for example, you only make $3 per hour in tips, your employer would be required to pay you $4.25 per hour. If you make $8 per hour in tips, your employer would still have to pay you the federally mandated $2.13 per hour.

Tip Pooling

Federal guidelines stipulate that employers can require employees to participate in a tip pool. In a tip pool, employees chip in a portion of their tips, which are then divided among a group of employees. This pool must prohibit employers from distributing any portion of the tips to managers or supervisors.

Tip pooling has been hotly contested, as there was debate about whether employees could be required to share their tips with employees who did not regularly receive tips. For example, some restaurants include all employees in a tip pool which allows the back-of-house staff who don’t normally receive tips (cooks and dishwashers) to receive a portion of the  tips left for servers, bartenders, and front-of-house staff that regularly interact with customers.

In March 2018, the FLSA was amended to clarify tip pooling rules. Employers that do not take a tip credit and pay employees the full minimum wage may establish a tip pool that includes back-of-house staff. Employers who take a tip credit must limit the tip pool to only employees who customarily and regularly receive tips.

Stealing Tips

Many people who rely on tips to make a living have experienced tip reallocation or withholding.

According to Manhattan waiter Steve Dublianca, bosses have a bagful of tricks to take tips from their employees.

“[Those tricks can include] pocketing the tips added to a credit card bill and keeping a cut for themselves when the money is passed along to the wait staff,” Dublianca says. “When tips are distributed by check, it’s never ever accurate. Not malicious intent usually, just lazy bookkeeping. But sometimes it’s greedy evil.”

If you fear that you have been a victim of wage theft, whether it’s tips withheld or not getting paid for overtime, the underpayment might be able to be addressed directly with your employer. Many payroll mistakes can be remedied very quickly.

If you are unable to solve these disputes with your employer, it may be something to bring to your union representative if you have one. Union representatives may have bargaining power to help resolve disputes between employers and employees much more quickly.

However, if you’ve tried either of these routes with no luck, or if you experience this problem frequently, it might be prudent to report your employer to the Department of Labor. In order to file a complaint, you’ll need to have your basic personal information as well as the name of the manager or business owner that you worked under and the name of the establishment itself. In order to insure that your claim is more likely to be taken seriously, it’s important to keep evidence of pay, stubs, personal records of the hours that you worked, as well as any other forms of written documentation you have received from your employer.

It’s also important to note that these reports are confidential, regardless of your immigration status. Depending on which U.S. state you’re employed in, there might also be stronger protections available. As with most laws regarding pay, Labor Department standards are treated by the law as a floor, as opposed to a ceiling.

In California, for example, it is illegal for an employer to threaten to report your immigration status if you file a complaint about workplace rights, missed pay, or working conditions.

Are Tips Taxed?

Although tips aren’t paid by your employer, any tips you receive for services performed are treated just like wages when it comes to the Internal Revenue Service. All tips, whether received in cash, added to a credit card, or through a tip pool are subject to tax.

You are responsible for reporting tips to your employer if you receive more than $20 in a given month. This must include, cash, check, and credit card tips.

Since pooled tips are so common in restaurants, one might expect that determining the income tax on tips might be difficult. Employees who work in restaurants where there is a tip pooling system, each individual reports their portion of the amount earned to their employer. States have different tip pooling laws and arrangements, but the federal tax reporting remains the same.

Employer Withholding Tips

Employers have a number of obligations when it comes to tip income, as per guidelines given by the IRS. They are responsible for recordkeeping and reporting responsibilities, collecting taxes on tips, filling out forms, and depositing taxes to the IRS.

Employers are required to retain employee tip reports, withhold employee income taxes and the employee’s share of social security and Medicare taxes based upon wages and tip income received and report that information to the IRS. In addition, employers are required to pay their portion of social security and Medicare taxes based on the total wages paid to that employee including tip income.

If an employee fails to report their tips to his or her employer, the employer is not liable for their share of social security and Medicare taxes on the unreported tips until notice and demand for those taxes is made to the employer by the IRS.

Withholding for taxes is not considered tax theft, as it is required by federal law.

Tipping Etiquette: When To Tip and How Much

While tipping is never required, it has become a very important part of the American social contract, and as such it has become a hotly debated topic.

How much should you tip? For which services should you tip those who perform them? When should you tip?

“There is no definitive guide to tipping,” Cornell professor Michael Lynn, a specialist in consumer psychology and the socioeconomic impacts of tipping told CNN. “There have been a number of studies done on tipping guidelines and it’s actually kind of complicated–not at all straightforward.”

While there is no clear answer to these questions, there are definitive guidelines that have been woven into the American social contract that determine who you tip, when to tip, and how much you ought to tip.

Food and Drink

Tipping 15-20 percent of the bill before taxes is considered the standard across the restaurant industry, though some tip more for exceptional service. Leaving anything lower than that reflects substandard service, while not leaving a tip at all indicates that you have received unacceptable or abominable service.

When it comes to bar services, the standard is $1-2 per drink ordered, or the same percentage on your tab that you would normally pay to a waiter at a dining establishment.

When it comes to takeout, it’s not customary for individuals to leave a tip, since they received no service from the wait staff for which the tipping system is skewed towards. However, if you purchase a large order, it is considered polite to tip 10 percent.

Those who deliver food to your door, including pizza and chinese restaurants, and more recently gig economy workers that deliver for Postmates, GrubHub, and UberEats typically receive tips in the 10-20 percent wage.

Hotel and Transportation

When traveling, many people have a hard time determining if they should tip the hotel staff as well as the people that help them get to their destinations. But it’s not quite as complicated as one might think.

If you’re traveling with bags and a bellhop helps you load in your luggage up to your room, it is appropriate to slip them $1-2 per bag. Tipping the hotel maid on your pillow with a note is also appropriate. Typically that amount is $2-5 per day. And if you order in room service, you should either tip $5 or a $15-20 percent gratuity if it is available on the check.

If you use a valet during your stay, typically you’ll want to tip $2-5 when the vehicle is returned to you. Hotel shuttle drivers that provide a free service from the hotel should receive a tip in the same range if they have to help you with your belongings.

Taxis, limos, vans, and paid shuttles ought receive 15 percent of the total fair, and more for above and beyond service. Other ride-sharing services, such as Uber, or Lyft, ought be paid the same.

Nail Salons, Hair Salons, and Tattoo Shops

The beauty and modification industry is another where it is a part of the social contract for you to tip the people who perform your service.

For salons, including both hair and nails, 15 percent will suffice, but many choose to tip closer to 20 percent. The same is true for massage therapists, waxing salons, and many other salon based services in the beauty industry.

As far as tattoo and piercing shops are concerned, it’s customary and expected that you pay a 15 percent or more tip, regardless of the size or location of the modification.

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