FLSA tip credit & minimum wage adjustment

The FLSA tip credit allows for an employer with hourly tipped employees to pay an employee less than the hourly minimum wage as long as the employee’s regular wages combined with their tips received equal or exceed the minimum wage.  

  • Note: If a state or local minimum wage is higher than the Federal minimum wage, you must use the highest applicable minimum wage.  

If wages and tips combined do not meet minimum wage thresholds, the employer must make up for it by paying the employee the difference. When you run payroll, Gusto will check that each employee earned enough tips to reach the minimum wage. If the employee is below minimum wage, the employee’s pay will be adjusted to equal the minimum wage.

  • Note: Work locations in Arkansas, California, Minnesota, Nevada, Oregon, or Washington do not apply for tip credits.

To qualify, you must first provide oral or written notice of the required information to your tipped employees.

An employer who fails to provide the required information cannot use the section 3(m) FLSA tip credit and therefore must pay the tipped employee at least $7.25 per hour in wages.

Set up, edit, or review FLSA tip credits for an employee

  1. Click the People tab.
  2. Click the employee’s name.
  3. Edit the work location if the current address is incorrect.
  4. Click edit next to the Compensation headline.
  5. Set the Employee Type to Paid by the Hour.
  6. Set the hourly wage.
  7. Check the box next to “I pay this employee less than minimum wage because they receive tips.”
    • Note: This will only appear after you enter the hourly wage.
  8. Set the minimum wage requirement in the Hourly Minimum Wage drop-down.
    • Note:  For questions about the correct minimum wage requirement to use, consult a CPA or call the state directly.
  9. Select whether the change was effective on a specific pay period or a specific date.
  10. Select the pay period for which the change should be effective on payroll.
  11. Add a note about the reason for the change.
    • For example: John moved to a different work location.
  12. Click Save.

When you process a payroll, if minimum wage adjustments are required, you will see a blue ‘wage adjustment’ note next to the employee’s gross pay on page one.

You may need to edit or review minimum wage requirements if:

  • The size of your company changes when you add or dismiss an employee
  • When minimum wage increases or legislation changes
  • When you change an employee’s work address
  • If you have never set it

For specific questions about the FLSA tip credit law, or minimum wage requirements, contact the Department Of Labor directly at 1(866) 487-9243.

Example minimum wage adjustment

  • You pay an employee $3/hr.
  • The employee is required to make a minimum wage of $8/hr.
  • The employee worked a total of 10 hours during the pay period, totaling $30 (hourly) and received $40 in cash tips, for total gross wages of $70.00.
  • The employer is required to pay the employee at the $8/hr rate; this means the employee is required to make $80.00 in gross wages for the 10 hours of work performed.  
  • During payroll, Gusto will automatically adjust the the gross wages to the minimum wage required, in this example $80.00.
  • The employer makes up the $10.00 difference by paying the additional amount to the employee in order to meet minimum wage requirements.

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