Tipped employee pay and tip reporting rules for employers in 2026
An employer that takes the tip credit under the Fair Labor Standards Act (FLSA) must pay tipped employees a direct cash wage of at least $2.13 per hour and make up any shortfall to the $7.25 federal minimum wage. Employers may not keep employees’ tips, and must collect and pay payroll taxes on reported tips and report 2026 cash tips on Form W-2 with code TP and occupation codes in box 14b. Figures are federal, as of November 2026.
Which of my employees count as tipped employees under federal wage law?
Under the FLSA, a tipped employee is an employee engaged in an occupation in which the employee customarily and regularly receives more than $30 a month in tips, as 29 U.S.C. 203(t) defines the term.
The test applies to each employee individually. A new server is not a tipped employee only because other servers receive tips above $30, and only tips actually received count. “Customarily and regularly” means a frequency greater than occasional but possibly less than constant. An employee who tops $30 only sporadically, such as in a holiday month, is not a tipped employee, while an employee who normally does is not disqualified by an occasional low month from illness, vacation or a seasonal dip.
What federal cash wage and maximum FLSA tip credit apply to tipped employees?
As of November 2026, federal law requires a direct cash wage of at least $2.13 per hour for a tipped employee, and the maximum tip credit is $5.12 per hour, which is the $7.25 federal minimum wage minus the $2.13 cash wage, per DOL Fact Sheet #15.
The employer may claim a credit smaller than the maximum but not a larger one, and under 29 U.S.C. 203(m)(2)(A) the additional amount on account of tips “may not exceed the value of the tips actually received.”
Do state laws change the cash wage or the tip credit for my business?
When state law differs from the FLSA, an employer must comply with the standard most protective of employees, and some states require a higher cash wage or prohibit the FLSA tip credit.
DOL’s table of tipped minimum wages, dated July 1, 2026, groups jurisdictions into those that require the full state minimum wage before tips, those that require a cash wage above $2.13 and those whose cash wage equals $2.13. It also notes that some local governments set higher minimums that it does not display. An employer confirms the figures for each work location with the labor agency for that state and any local government.
What must I tell tipped employees before I take the FLSA tip credit?
An employer must tell tipped employees about the tip credit before taking it, orally or in writing, and an employer that does not give the required information cannot take the credit. As of November 2026, DOL Fact Sheet #15 says the notice covers five items.
* State the direct cash wage, which must be at least $2.13 per hour.
* State the additional amount claimed as a tip credit, which cannot be more than $5.12.
* Explain that the tip credit cannot exceed the tips actually received.
* Explain that employees keep all tips except through a valid tip pool limited to employees who customarily and regularly receive tips.
* Explain that the credit will not apply to an employee who has not been informed of these provisions.
What do I owe when an employee’s tips and cash wage fall short of the minimum wage?
If a tipped employee’s tips plus the direct cash wage do not reach the federal minimum wage in a workweek, the employer must make up the difference. DOL says the employer must do so at the regular payday for the period in which the workweek ends, and an employer taking the FLSA tip credit must be able to show in each workweek that the cash wage plus tips reach the full $7.25 (DOL Fact Sheet #15).
When an employer takes the FLSA tip credit, overtime is calculated on the full $7.25 minimum wage, not the lower cash wage, and the employer may not take a larger tip credit for an overtime hour than for a straight-time hour, per DOL Fact Sheet #15.
For an employee who receives only tips and no cash wage, the employer must meet the FLSA tip credit requirements and pay a cash wage of at least $2.13 per hour, or pay the full $7.25 in cash wages. Deductions for walkouts, breakage or cash register shortages are illegal where the employer claims the FLSA tip credit, because any such deduction would reduce the tipped employee’s wages below the minimum wage (DOL Fact Sheet #15).
How do dual jobs and side work affect the FLSA tip credit?
An employee who holds one tipped and one non-tipped occupation with the same employer is a tipped employee only for the tipped occupation, and the employer owes the full minimum wage for hours worked in the non-tipped occupation.
The current regulation, 29 CFR 531.56(e), allows a tip credit only for hours in the tipped occupation and treats related duties in that occupation as part of it even when they do not produce tips. DOL Fact Sheet #15 distinguishes a dual job from a server who spends part of the time “cleaning and setting tables, toasting bread, making coffee and occasionally washing dishes or glasses,” and says such related duties “need not by themselves be directed toward producing tips.”
Does the 80/20 rule for non-tipped duties still apply?
The 80/20 rule for non-tipped duties is not current DOL policy. Field Assistance Bulletin 2026-1, dated October 19, 2026, from DOL’s Wage and Hour Division (WHD), says guidance that contemplates specific time limits on duties performed within a tipped occupation “no longer reflects WHD policy.”
The 2021 Dual Jobs Rule had capped non-tipped directly supporting work at 20 percent of the workweek or 30 continuous minutes, and the Fifth Circuit vacated it in Restaurant Law Center v. U.S. Department of Labor in 2024. DOL then reinstated the 1967 dual jobs regulation, which the bulletin says “remains in effect today.” DOL withdrew the 80/20 guidance in its Field Operations Handbook on January 14, 2025.
The bulletin says the statute and regulation allow the tip credit based on whether the employee is engaged in a tipped “occupation,” not on the kind of duties performed. It also says DOL is developing a notice of proposed rulemaking to amend various provisions in subpart D of 29 CFR part 531, which holds the tipped employee regulations (Field Assistance Bulletin 2026-1).
Can I require a tip pool, and who can be in it?
An employer can require a mandatory tip pool, and who may be in it depends on whether the employer takes the FLSA tip credit.
When the employer takes the FLSA tip credit, the pool is limited to employees in occupations in which they customarily and regularly receive tips, such as waiters, bellhops, counter personnel who serve customers, bussers and service bartenders. The employer must notify tipped employees of any required contribution amount and may take the credit only for the tips each employee ultimately receives.
When the employer pays the full minimum wage and takes no tip credit, the pool may include employees who are not in a tipped occupation, such as dishwashers and cooks. DOL Fact Sheet #15 allows this only if all workers receive a direct cash wage of at least the federal minimum wage, currently $7.25.
In either type of pool, the employer may not receive tips from the pool, and the FLSA sets no maximum percentage or amount for each employee’s contribution. An employer that collects tips to run the pool must distribute them in full no later than the regular payday for the workweek in which they were collected, or for the period in which that workweek ends when the pay period covers more than one workweek. If the employer cannot ascertain the amounts or how to distribute them before processing payroll, it must distribute them as soon as practicable after the regular payday (29 CFR 531.54).
Can managers or owners keep tips or share in the tip pool?
An employer, including any manager or supervisor, may not keep any portion of employees’ tips, whether or not the employer takes a tip credit (29 U.S.C. 203(m)(2)(B)).
For these rules, DOL Fact Sheet #15B treats as a manager or supervisor any employee who meets the executive duties test. That employee customarily and regularly directs the work of at least two other full-time employees or their equivalent, has authority to hire or fire (or the employee’s suggestions on hiring, firing, advancement, promotion or other change of status are given particular weight), and has a primary duty of managing the enterprise or a customarily recognized department or subdivision. No salary level applies for tip purposes, and a business owner with at least a bona fide 20 percent equity interest who is actively engaged in management also counts.
A manager or supervisor may keep tips a customer gives directly for a service the manager directly and solely provides, but may not receive tips from a tip pool or tip jar. A manager may be required to contribute their own tips to a mandatory pool.
DOL can assess civil money penalties against employers that keep employees’ tips “regardless of whether those violations are repeated or willful” (DOL tips page).
Is a service charge or automatic gratuity a tip?
A compulsory service charge is not a tip; under the FLSA it can count toward minimum wage and overtime (DOL Fact Sheet #15), and for payroll taxes the IRS treats a service charge paid to an employee as wages (IRS Topic 761). A tip is a sum a customer presents as a gift or gratuity, and the customer alone determines whether to give one and how much (29 CFR 531.52).
The IRS treats a mandatory charge paid to an employee as non-tip wages subject to social security tax, Medicare tax and federal income tax withholding (IRS Topic 761). Suggested tip percentages of 15, 18 and 20 on a bill are not service charges if the customer may choose any amount or leave the line blank (IRS tip recordkeeping page).
For the qualified tips deduction, service charges, automatic gratuities and other mandatory amounts automatically added to a bill are not qualified tips even if distributed to employees, unless the customer is expressly given an option to disregard or modify them, including to zero. A point-of-sale prompt offering 15, 18, 20, other and no tip can yield a qualified tip, but where a prompt forces a choice above zero, only an amount the customer pays voluntarily above the required minimum can be one (26 CFR 1.224-1).
Can I deduct card processing fees from employees’ tips?
An employer may pay an employee a credit card tip less the percentage the card company charges the employer, but no more than the transaction fee, whether or not the employer takes a tip credit. Deducting more is a violation of the rule against keeping tips.
The fee may not push the employee below the minimum wage, including any FLSA tip credit claimed. The employer must pay the amount due no later than the regular payday and may not hold it while awaiting reimbursement from the card company. DOL notes that some states are more protective and do not allow the fee deduction (DOL Fact Sheet #15).
What tip reports and records do I need to collect and keep?
An employee who receives $20 or more in cash tips in a month must report the total to the employer in writing by the 10th of the following month (IRS Topic 761). If the 10th falls on a Saturday, Sunday or legal holiday, the report is due the next day that is not (IRS tip recordkeeping page).
Cash tips include tips received directly from customers, tips from other employees under tip sharing, and charged tips the employer distributes, and both directly and indirectly tipped employees must report. The statement must be signed and dated and show the employee’s name, address and Social Security number, the employer’s name and address, the period covered and the total tips. An employer may require reports more than once a month, but one statement cannot cover more than one calendar month, and the employer must retain the reports (IRS tip recordkeeping page and Publication 15).
The IRS says no particular form must be used, and Publication 15 says an employer may set up an electronic tip reporting system. Form 4070, Employee’s Report of Tips to Employer, and Form 4070A “were made historical,” according to Publication 531.
An employer that takes the FLSA tip credit must also keep DOL records of the tips each employee reported and the hours worked each workday in tipped and in non-tipped occupations (DOL Fact Sheet #15).
How do I withhold income tax and FICA on tips and pay my share?
The employer collects federal income tax and employee social security and Medicare tax (FICA) on reported tips from the employee’s wages other than tips or from other funds the employee makes available, does not take the income tax due on tips out of the tips themselves, treats tips as paid when the employee reports them, and owes its own share of social security and Medicare tax on wages plus reported tips. Employee social security and Medicare tax on tips still uncollected by the 10th of the month after the month the employee reported them need not be collected (Publication 15, IRS Topic 761).
How do tips show up on Form 941 and Form W-2?
For 2026 wages, Form W-2 box 12 code TP reports total cash tips reported to the employer and box 14b reports the Treasury Tipped Occupation Code or codes (code TT is qualified overtime, not tips), and on Form 941 reported tips go on line 5b, line 5c and, if applicable, line 5d rather than line 5a.
What does the qualified tips deduction change for employers in 2026?
The qualified tips deduction is an income tax deduction of up to $25,000 that an employee claims on a return for tax years 2025 through 2028; tips stay subject to social security and Medicare tax, and the employer uses an employee’s updated Form W-4 to reflect it in withholding (Publication 15).
The shorthand “no tax on tips” describes an income tax deduction on the employee’s return, not an exclusion from wages, and tips remain generally subject to federal income tax withholding and to both the employer share and employee share of social security and Medicare tax when they total $20 or more per month, so employers still withhold and report tips (2026 Form W-2 instructions and Publication 15).
The IRS says employers must use an employee’s updated Form W-4, if the employee submits one, and the federal income tax withholding procedures in Publication 15-T, and the employee estimates qualified tips in Step 4(b) of the 2026 Form W-4.
The employer-side change is in reporting. The 2026 Form W-2 instructions split box 14 into box 14a, the former Box 14 Other, and box 14b, which holds up to two Treasury Tipped Occupation Codes. If tips came from more than two occupations, the employer lists any two, and if any tips came from a nonqualifying occupation, 000 must be one of the codes. Cash tips reported to the employer stay in boxes 1, 5 and 7.
For taxable year 2025 only, Notice 2025-62 says the IRS will not impose the section 6721 or 6722 penalty on an employer that did not separately report cash tips or the employee’s occupation on Form W-2, if the return or statement is otherwise complete and correct, and states that the relief “applies only for taxable year 2025.” The 2025 penalty relief does not cover 2026 wages. The IRS draft 2027 Form W-2, marked not for filing, still lists box 12 code TP and box 14b.
Which occupations and which tips qualify for the federal qualified tips deduction?
Qualified tips are voluntary cash tips received in an occupation on the IRS list of occupations that customarily and regularly received tips on or before December 31, 2024, a list of more than 70 occupations in eight categories, each with a three-digit Treasury Tipped Occupation Code (IRS news release IR-2026-49). Employers find the codes on the IRS list of occupations.
Under the final regulation at 26 CFR 1.224-1, qualified tips are cash tips received from customers or, for an employee, through a mandatory or voluntary tip-sharing arrangement such as a tip pool. They must be paid voluntarily and without consequence for nonpayment, must not be negotiated and are determined by the payor.
Amounts a manager or supervisor receives through a tip pool are not qualified tips, although tips from customers for the manager’s own service can be. An amount is not a qualified tip if it recharacterizes wages or payments for services as tips, and where the employer of an employee is the payor of a cash tip, an irrebuttable presumption says it is not a qualified tip. To be deductible, tips must appear on a Form W-2, 1099-NEC, 1099-MISC or 1099-K, or be reported by the worker on Form 4137.
The list governs the income tax deduction only. It is not the FLSA test of a tipped employee and has no effect on tip pooling or the FLSA tip credit.
As of November 2026, the IRS tip recordkeeping page says that until January 1 of the first calendar year following issuance of final regulations on how to determine whether a trade or business is a specified service trade or business, the IRS treats employees in a listed occupation as not having received tips in one.
Do I have to file Form 8027 and allocate tips?
Only an employer that operates a large food or beverage establishment files Form 8027. As of November 2026, the Form 8027 instructions define that as a food or beverage operation located in the 50 states or the District of Columbia, where tipping of food or beverage employees by customers is customary, and whose employer normally employed more than 10 employees on a typical business day during the preceding calendar year.
A food or beverage operation provides food or beverages for consumption on the premises, other than fast-food operations, and the employer files a separate Form 8027 for each establishment. The instructions run the 10-employee test on hours, count all employees at all of the employer’s food or beverage operations, and treat the test as met when the result on the optional worksheet is greater than 80 hours.
For calendar year 2026, the return is due March 1, 2027, or March 31, 2027 if filed electronically, and the Information Returns Intake System (IRIS) is the only system for electronically filing 2026 Form 8027 (Form 8027 instructions).
If a large food or beverage establishment’s total tips reported to the employer during a payroll period are less than 8 percent of its gross receipts for that period, other than carryout sales and receipts with a service charge of 10 percent or more, or an IRS-approved lower rate that cannot be lower than 2 percent, the employer must allocate the difference among directly tipped employees who have a reporting shortfall. Allocated tips appear in Form W-2 box 8, are not included in boxes 1, 3, 5 or 7, and carry no income, social security or Medicare tax withholding (Form 8027 instructions).
Is there a tax credit for the payroll tax I pay on tips?
Under section 45B, an employer may be eligible to claim the FICA tip credit, a general business credit for the employer social security and Medicare tax it paid on certain employee tips, claimed on Form 8846. The FICA tip credit is different from the FLSA tip credit, a DOL minimum wage credit.
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