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The federal cash wage for a tipped employee is $2.13 an hour, and the employer may credit up to $5.12 of what you leave against the minimum wage it owes. In eight jurisdictions that credit does not exist and your tip is on top of a full wage. A compulsory service charge is not a tip in either body of law that uses the word. The percentage is yours to set; what follows is what it is standing in for.
Last updated 1 October 2026
Arithmetic, with the wage law behind it cited rather than summarised. This page multiplies a bill by a percentage and divides by a head count. It is not employment or tax advice, it does not know which state you are in, and the wage figures quoted below are federal floors that many states raise. Every one carries its source and the date it was read.
A tip is legally a gift. 29 CFR 531.52(a) is unambiguous about it: “a tip is a sum presented by a customer as a gift or gratuity in recognition of some service performed for the customer. It is to be distinguished from payment of a charge, if any, made for the service. Whether a tip is to be given, and its amount, are matters determined solely by the customer.”
And yet it does not feel optional, which is not a cultural accident. It is a wage structure written into the Fair Labor Standards Act. The Department of Labor sets out the two numbers that do the work: “an employer must pay a tipped worker at least $2.13 per hour”, and “the maximum tip credit that an employer can currently claim is $5.12 per hour: ($7.25 - $2.13 direct (or cash) wage = $5.12).” On those figures 70.6% of the federal minimum wage for a tipped job is money the employer expects the customer to put on the table.
The federal arithmetic of a tipped hour
The structure has a floor under it, and it is worth knowing because it is routinely misdescribed. The credit is not a licence to pay $2.13 and stop: “if an employee’s tips combined with the employer’s direct (or cash) wages do not equal the minimum hourly wage of $7.25 per hour in each workweek, the employer must make up the difference.” The credit is also capped by what actually arrived rather than by the $5.12 figure, because among the things an employer must tell a tipped employee before claiming it is “that the tip credit claimed by the employer cannot exceed the amount of tips actually received by the tipped employee”. The same notice must state the cash wage being paid, the credit being claimed, “that all tips received by the tipped employee are to be retained by the employee except for a valid tip pooling arrangement”, and that the credit does not apply at all “unless the employee has been informed of these tip credit provisions.”
Who this applies to is also narrower than the word suggests. A tipped employee is “an employee engaged in an occupation in which they customarily and regularly receive more than $30 a month in tips”. Thirty dollars a month is the whole threshold.
None of the above is the law everywhere, because a state may be more generous than the federal floor and several are. On the Department of Labor’s table of minimum wages for tipped employees, current as of 1 July 2026, one group of jurisdictions sits under the heading “State requires employers to pay tipped employees full state minimum wage before tips”, and there are eight of them: Alaska, California, Guam, Minnesota, Montana, Nevada, Oregon and Washington.
Montana appears there with a condition attached to the size of the business, the table giving $10.85 an hour for a “business with gross annual sales over $110,000” and $4.00 for a “business not covered by the Fair Labor Standards Act with gross annual sales of $110,000 or less”. A second and larger group of states takes the middle path, described by the table as requiring employers “to pay tipped employees a minimum cash wage above the minimum cash wage required under the federal Fair Labor Standards Act ($2.13/hour)” while still allowing a credit.
The practical reading, for anyone deciding what to leave: in eight places your tip is on top of a full wage, in most others part of it is standing in for one, and which of those you are sitting in is a fact about the address rather than about the bill.
The 18% added automatically to a party of eight is not a tip. It is not a tip under the wage rules and it is not a tip for tax, and the consequences differ in each.
On the wage side, 29 CFR 531.55(a): “a compulsory charge for service, such as 15 percent of the amount of the bill, imposed on a customer by an employer’s establishment, is not a tip and, even if distributed by the employer to its employees, cannot be counted as a tip received in applying the provisions of sections 3(m)(2)(A) and 3(t).” The same rule extends it to negotiated events: “where negotiations between a hotel and a customer for banquet facilities include amounts for distribution to employees of the hotel, the amounts so distributed are not counted as tips received.”
Subsection (b) then says what such a charge can be used for, and this is the sentence that matters at the table: service charges “become part of the employer’s gross receipts”, and where they are handed on, “they may be used in their entirety to satisfy the monetary requirements of the Act.” An automatic gratuity can therefore be spent on the wage the employer already owed. A voluntary tip cannot be kept at all: the Department of Labor states that “regardless of whether an employer takes a tip credit, the FLSA prohibits employers from keeping any portion of employees’ tips for any purpose, whether directly or through a tip pool”, and 29 CFR 531.52(b)(2) closes the obvious gap, allowing a manager or supervisor to keep only “tips that he or she receives directly from customers based on the service that he or she directly and solely provides.”
On the tax side the IRS draws the same line in different words: “service charges added to a bill or fixed by the employer that the customer must pay, when paid to an employee, won’t constitute a tip but rather constitute non-tip wages.” Tips themselves are reportable from a low threshold, since “employees who receive cash tips of $20 or more in a calendar month while working for you, are required to report to you the total amount of tips they receive.”
The line has acquired a second edge since 2025. The IRS describes a deduction under which, “effective 2025 through 2028, employees and self-employed individuals may deduct qualified tips” received in occupations it identified as “customarily and regularly receiving tips” on or before 31 December 2024, with a “maximum annual deduction” of “$25,000” that “phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).” The definition is where the two bodies of law meet: “qualified tips are voluntary cash or charged tips received from customers including shared tips.” Voluntary. A mandatory service charge, being non-tip wages, is outside it.
So when a bill arrives with a service charge already on it, the question worth asking is not whether to add more. It is whether that line is a tip at all, because the law says it is not.
Two pieces of arithmetic are genuinely useful here, and neither is complicated.
The first is the base. Tipping on the tax-inclusive total rather than the food means tipping on the tax, and the surcharge is exactly the tip rate multiplied by the tax rate. On a $60.00 food bill with tax at an illustrative 8.875%, the tax is $5.33 and the total $65.33. Twenty per cent of $60.00 is $12.00; twenty per cent of $65.33 is $13.07. The difference of $1.07 is 0.20 times 0.08875 of the food bill, or 1.775%. Neither choice is wrong, but it is worth knowing which one you are making, and the bill field above applies your percentage to whatever figure you put in it.
The second is the split, where the usual approach quietly loses or invents money. A total divided by a head count almost never lands on a whole cent, and rounding every share the same way misses.
$100.00 across six people
The method generalises in one line: take the whole-cent floor of the share, multiply it back by the head count, and give the leftover cents to as many people as there are cents. A $104.43 total across seven is six shares of $14.92 and one of $14.91. For a party of friends the two cents are a rounding error; for anyone squaring a card against a receipt, they are the reason the numbers refuse to meet.
A bill, a percentage and a head count are the whole input. What follows is worth naming precisely, because every item on the list changes what a fair tip actually is, and not one of them is visible on a receipt.
Where you are. In eight jurisdictions the tip sits on top of a full state minimum wage; elsewhere up to $5.12 an hour of a federal wage is being credited against it. That difference is the single biggest input into what a tip means, and it is a function of the address, not of the bill.
Whether a service charge is already on the bill. If it is, the law treats it as the employer’s receipts rather than the employee’s tip, and it may lawfully be spent on wages that were already owed. A percentage applied on top of it is a second, different payment.
Who the money reaches. Tip pools, kitchen shares and valid pooling arrangements all redistribute it, within the rules quoted above. The percentage field has no view on who ends up with it.
Whether the bill is pre-tax or post-tax. The arithmetic applies your rate to the figure you type. The 1.775% example above is what that choice costs on one set of numbers.
Anything the employee is owed and has not received. A shortfall against $7.25 an hour is the employer’s to make up, and no tip calculator can see whether that happened.
What is customary where you are sitting. There is no federal percentage, and this page does not assert one. The default in the field is a starting point to change, not a recommendation.
Boundary behaviour worth knowing. A negative bill or tip percentage is raised to zero, a tip above 100% is lowered to 100%, and the party is held between 1 and 50 people, which is what the fields themselves say. In each case the field is rewritten to the figure actually used when you leave it, so the screen never shows one number and compute another. The bill is also capped at $1 trillion, which is where whole cents stop being exact arithmetic here rather than a judgement about restaurants.
Nothing you type into the fields above leaves your browser.
Every quotation above was read from the page or regulation named on 1 October 2026, and the two Department of Labor wage figures were taken from the agency rather than from a secondary table. The dollar and percentage arithmetic in this page’s own examples was carried out in exact decimal form before being written. Part of the QuikUtil tools collection; the Sales Tax Calculator covers the tax half of a restaurant total, and the Percentage Calculator is the same arithmetic without the restaurant.
Because federal law lets an employer count your tip toward the wage it owes. The Department of Labor puts the two figures together: “an employer must pay a tipped worker at least $2.13 per hour”, and “the maximum tip credit that an employer can currently claim is $5.12 per hour”. So on the federal floor, $5.12 of every hour is expected to come from customers, while the tip itself stays legally a gift: 29 CFR 531.52(a) says “whether a tip is to be given, and its amount, are matters determined solely by the customer.” Both are true at once, which is the whole of the awkwardness.
The employer owes the shortfall, week by week: “if an employee’s tips combined with the employer’s direct (or cash) wages do not equal the minimum hourly wage of $7.25 per hour in each workweek, the employer must make up the difference.” The credit is also limited to what actually arrived rather than to $5.12, because the employer must tell the employee “that the tip credit claimed by the employer cannot exceed the amount of tips actually received”.
Yes, eight. On the Department of Labor’s table of minimum wages for tipped employees, current as of 1 July 2026, Alaska, California, Guam, Minnesota, Montana, Nevada, Oregon and Washington sit under the heading “State requires employers to pay tipped employees full state minimum wage before tips”, with Montana’s entry conditioned on gross annual sales. A larger group of states raises the cash wage above $2.13 without abolishing the credit.
No, in either body of law that uses the word. 29 CFR 531.55(a): “a compulsory charge for service, such as 15 percent of the amount of the bill, imposed on a customer by an employer’s establishment, is not a tip” and “cannot be counted as a tip received”. Such sums become the employer’s gross receipts and “may be used in their entirety to satisfy the monetary requirements of the Act.” The IRS agrees for tax: service charges the customer must pay “won’t constitute a tip but rather constitute non-tip wages.” So an automatic gratuity can lawfully fund a wage already owed.
Either is defensible, and the difference is computable rather than a matter of opinion. On a $60.00 food bill with tax at 8.875%, the total is $65.33. Twenty per cent of the pre-tax figure is $12.00 and twenty per cent of the total is $13.07. In general the gap is the tip rate times the tax rate: 0.20 times 0.08875 is 1.775% of the food bill. The bill field above applies your percentage to whatever you type into it, so the choice is yours to make deliberately.
Share out the leftover cents instead of rounding every share the same way. A $100.00 total across six is $16.666... each; six people paying $16.67 hand over $100.02, and six paying $16.66 leave $99.96. Take the whole-cent floor, multiply it back, and give the leftover cents to that many people: four pay $16.67 and two pay $16.66, which is $100.00 exactly. A $104.43 total across seven is six shares of $14.92 and one of $14.91.