How to pay tips to employees: cash, card, and the paycheck

Cash tips stay with the worker. Card tips are due on payday.

A tip is money a customer chooses to give a worker for service. You do not own it. You still treat reported tips as wages when you figure tax.

Cash tip

The worker keeps it, then reports it

Card tip

You pay it by the regular payday

Short week

You make up the minimum wage

The IRS is the Internal Revenue Service, the federal tax agency. Publication 15 (Circular E) is the IRS Employer’s Tax Guide. In that book, cash tips include tips paid by cash, by check, by debit card, and by credit card.

The DOL is the U.S. Department of Labor, the federal labor agency. Fact Sheet #15 is the DOL sheet on tipped workers under the FLSA. The FLSA is the Fair Labor Standards Act, the federal wage-and-hour law. That sheet says you pay a credit-card tip no later than the regular payday. You may not hold it while you wait for the card company to pay you.

A cash tip the customer hands the worker stays in the worker’s pocket. The worker still reports it. A card tip usually hits your account first. You then owe it to the worker.

A service charge is not a tip. Fact Sheet #15 uses a required percent of the bill as the example. The IRS tip recordkeeping page uses a mandatory 18 percent charge for a large party. If you pay that charge out to the worker, it is wages. Only an extra amount the customer chooses to add is a tip.

How to pay tips to employees after the monthly report

You cannot withhold the tax on tips until the worker tells you the amount. Publication 15 says the worker reports cash tips by the 10th of the month after the tips were received. No report is required for a month under $20.

If you do not set a method, the worker gives you a statement. The worker signs it and dates it. It names the worker, the worker’s address, and the worker’s Social Security number. It names you and your address. It names the month, or the dates if the period is shorter than a month. It states the total tips.

Publication 531 is the IRS guide to reporting tip income. It says Form 4070, Employee’s Report of Tips to Employer, and Form 4070A, Employee’s Daily Record of Tips, are historical. Those forms used to sit in Publication 1244. An old Form 4070 can still be the statement. Any writing with the same facts can be the statement. You may also take the report on a computer. Publication 15 points that electronic path to Regulations section 31.6053-1(d).

The statement cannot cover more than one calendar month. You may ask for it more than once in a month. If the 10th is a Saturday, Sunday, or legal holiday, Publication 531 moves the report to the next day that is not one of those. If the job ends during the month, the worker can report the tips when the job ends.

A directly tipped worker gets tips from customers. An indirectly tipped worker gets tips from other workers, such as a busser in a tip pool. Both report. Publication 531 says the worker reports tips they keep, including tips from other workers. The worker does not report the part they pass on.

A noncash tip, such as a ticket or a pass, is still income. Publication 531 says the worker does not report it to you. Social Security tax and Medicare tax do not apply to it.

Withholding when the paycheck cannot cover the tax

Withholding means money you take out of pay and send to a tax agency. On reported tips, Publication 15 says you collect federal income tax, the worker’s Social Security tax, and the worker’s Medicare tax.

FICA is the Federal Insurance Contributions Act. It is the law for Social Security tax and Medicare tax. For 2026, Publication 15 sets Social Security at 6.2 percent for the worker and 6.2 percent for you, on wages and tips up to $184,500. Medicare is 1.45 percent for the worker and 1.45 percent for you. Medicare has no wage cap. You also withhold Additional Medicare Tax, an extra 0.9 percent, once the wages and tips you pay that worker pass $200,000 in the year. You do not match that extra 0.9 percent.

Take the worker’s share from wages, not from the tip itself, or from other money the worker hands you. Publication 15 says not to withhold the income tax on tips out of the tips. Tips count as paid when the worker reports them to you.

Your own Social Security tax on those tips runs until that worker’s wages and tips reach $184,500. Your own Medicare tax on tips runs all year. If the worker reports $20 or more of tips in writing in a month, those tips are also subject to FUTA. FUTA is the federal unemployment tax. Only you pay it. Employer payroll taxes percentage is that employer share. How to pay employees is the paycheck this tip sits on.

If, by the 10th of the next month, you do not have enough of the worker’s money to take the tax, you stop collecting it. Publication 15 sets the order. First, withhold on regular wages and other pay. Second, withhold Social Security and Medicare taxes on the tips. Third, withhold income tax on the tips.

The worker can give you money for the rest until the calendar year ends. Publication 531 says that. Tax still missing at year-end goes on Form W-2. Form W-2 is the wage and tax statement. Box 12, code A, is uncollected Social Security tax on tips. Box 12, code B, is uncollected Medicare tax on tips. Do not put uncollected Additional Medicare Tax in box 12.

You still report the tips. Publication 15 puts them on Form 941, the quarterly federal payroll tax return. A negative adjustment on Form 941, line 9, covers the uncollected worker share of Social Security and Medicare tax. You still owe your own share on the reported tips. The IRS tip recordkeeping page also puts reported tips in Form W-2 box 1, box 5, and box 7. Box 7 is Social Security tips.

The tip credit and the cash wage you still owe

A tipped employee, under the FLSA, works a job that customarily and regularly brings in more than $30 a month in tips. Fact Sheet #15 states that test. The DOL table of state minimum wages for tipped employees prints the same federal line. That table was last revised July 1, 2026.

The tip credit is the part of the minimum wage you may count from the worker’s tips, instead of paying it in cash. Section 3(m) of the FLSA is 29 U.S.C. 203(m). Fact Sheet #15 says the cash wage under the FLSA is at least $2.13 an hour. The federal minimum wage is $7.25 an hour. The largest tip credit is $5.12 an hour. That is $7.25 minus $2.13. Only tips the worker actually receives count.

Each workweek, the cash wage plus the tips must reach at least $7.25 an hour. If they fall short, you pay the difference. Fact Sheet #15 says that makeup is due on the regular payday for the period in which the workweek ends.

Before you take the credit, tell the worker five facts. State the cash wage, at least $2.13. State the tip credit you claim, no more than $5.12. State that the credit cannot exceed the tips the worker actually received. State that the worker keeps all tips, except a valid tip pool limited to workers who customarily and regularly receive tips. State that the credit does not apply unless the worker got this notice. Spoken notice counts. Written notice counts. Skip the notice, and you cannot take the credit.

Overtime is extra pay after 40 hours in a workweek. If you take the tip credit, figure that overtime on the full $7.25 minimum wage, not on the $2.13 cash wage. You may not take a bigger tip credit on an overtime hour than on a straight-time hour.

When a state rule protects the worker more than the FLSA, follow the state rule. The DOL table is the cash-wage list. The Wage and Hour Division says to confirm a state figure with that state’s labor office. The state pages here cover registration, unemployment tax, and what comes off the paycheck. They are not a second copy of the table.

One group on the table pays the full state minimum wage before tips. That group does not print a tip credit. California lists a minimum cash wage of $16.90. Washington lists $17.13. Oregon lists $15.55 as the standard statewide rate, $16.80 in the Portland metro area, and $14.55 in nonurban counties. Minnesota lists $11.41. Nevada lists $12.00. Alaska lists $14.00.

Montana is in that same group, with two cash wages. The table prints $10.85 for a business with gross annual sales over $110,000. It prints $4.00 for a business the FLSA does not cover, when gross annual sales are $110,000 or less.

Florida is in the group that pays more than the federal $2.13 cash wage. The row prints a combined cash-and-tip minimum of $14.00, a tip credit of $3.02, and a minimum cash wage of $10.98. A footnote says the Florida minimum wage is scheduled to rise by $1.00 on each September 30 until it reaches $15.00 on September 30, 2026. The numbers in the row are from the July 1, 2026 revision of the table.

New York does not get one cash wage on that table. The row prints a basic combined cash-and-tip minimum of $17.00 in New York City, Long Island, and Westchester, and $16.00 in the rest of the state. It says tipped workers’ rates vary by region and by the type of employer.

Texas is in the group whose minimum cash wage matches the federal $2.13. The row prints a tip credit of $5.12 and a combined rate of $7.25. It defines a tipped employee as a worker who receives more than $20 a month in tips. A footnote says Texas minimum-wage law leaves out employment the FLSA already covers.

Who can share a tip pool

A tip pool means workers share tips. 29 CFR 531.54 is the federal rule. Fact Sheet #15 restates it.

FLSA section 3(m)(2)(B) says you may not keep any of the workers’ tips. That ban applies whether or not you take a tip credit. You may not make a worker turn tips over to you, to a manager, or to a supervisor. Paying the full $7.25 cash wage does not lift the ban.

A manager or supervisor has three traits together. The main duty is managing the business, or a recognized department of it. The person regularly directs at least two other full-time workers, or the same amount of work. The person can hire or fire, or the person’s advice on hiring or firing carries particular weight. An owner who holds at least a real 20 percent share, and who actively manages, is in that group too.

A manager may keep a tip a customer hands them for service that manager alone performed. A manager who waits their own tables may keep those tips. That manager may not take other workers’ tips out of a pool.

If you take a tip credit, the pool can include only workers who customarily and regularly receive tips. Fact Sheet #15 names waiters, bellhops, counter workers who serve customers, bussers, and service bartenders. Cooks and dishwashers stay out of that pool.

If every worker in the pool gets a cash wage of at least the full federal minimum wage, now $7.25, the pool can include people who are not in a tipped job. Cooks and dishwashers can be in that pool. You still cannot keep any of the tips. Managers and supervisors still cannot take from it.

A valid required pool has no federal cap on the share each worker puts in. If you collect the tips to run the pool, pay them out by the regular payday for that workweek. If the pay period is longer than one week, use the payday for the period in which that week ends. If you cannot know the amount before payroll runs, pay the tips as soon as you can after that payday.

Can you pay tips in cash?

Yes, for cash the customer already gave the worker. That money stays with the worker. You do not collect it so you can pay it back.

A card tip is an amount you owe. Fact Sheet #15 says you pay it by the regular payday. The sheet does not make you wait for the card company. It also does not choose cash over the paycheck for that payment. Paying the owed amount in cash by payday meets the payday rule.

Do card tips go on the paycheck?

They are due by the regular payday. Many shops put that amount on the paycheck for that payday. The fact sheet requires the payday. It does not require a separate payout on the same day the customer paid.

A cash tip the worker already kept is not paid again on the check. The tax on tips the worker reported can still come out of the paycheck. That is withholding. It is not a second payment of the cash tip.

Can you keep a cut for card fees?

Fact Sheet #15 lets you subtract only the percent the card company charges you on that sale, and only if you can show the fee. The sheet’s example is a company that charges 3 percent. In that example, you may pay the worker 97 percent of the tip. You may not take more than the company’s fee. The rule is the same whether or not you take a tip credit.

The fee also may not push the worker under the required minimum wage, counting any tip credit you claim. The sheet says some states have a stronger rule and do not allow this subtraction. The sheet does not name those states. Do not guess that your state allows the cut.

The qualified-tips deduction stays on the worker’s return

Public Law 119-21 is the statute. The 2026 instructions for Forms W-2 and W-3 call it the One Big Beautiful Bill Act. It lets a worker deduct qualified tips on the worker’s own tax return. The deduction does not stop Social Security withholding. It does not stop Medicare withholding.

Publication 15 caps the deduction at $25,000 of qualified tips. It applies to tax years that begin after 2024 and end before 2029. Qualified tips are voluntary cash tips, including charged tips, from customers or from a tip-sharing arrangement. A mandatory service charge is not a qualified tip. The job must be one that customarily and regularly received tips on or before December 31, 2024.

The IRS tip recordkeeping page says the deduction covers tax years 2025 through 2028. The worker can claim it without itemizing. The deduction gets smaller once income is high. Modified adjusted gross income is the income figure that cutoff uses. The line is over $150,000, or over $300,000 on a joint return. The tips must show on Form W-2, or on Form 4137 if the worker is reporting tips you never received. Form 4137 is Social Security and Medicare Tax on Unreported Tip Income. A married worker must file a joint return. The return needs a Social Security number that is valid for work.

You still withhold Social Security tax and Medicare tax when reported tips are $20 or more in a month. Income-tax withholding also stays, unless the worker gives you a new Form W-4. Form W-4 is the Employee’s Withholding Certificate. If the worker turns one in, Publication 15 says you use it, along with Publication 15-T, so the expected deduction can show up in take-home pay before filing season.

On the Form W-2 you file, the tip recordkeeping page says to put cash tips reported to you in box 12 with code TP. Put the Treasury Tipped Occupation Code in box 14b. That code is the IRS label for the tipped job. Publication 15 points to Notice 2025-62 for transition relief on the 2025 reporting rules. The notice does not cancel the withholding.

Large food and beverage shops and two extra forms

Two federal forms sit on top of the monthly report for some food and beverage employers. A small cafe that never hits the size test can skip both.

Form 8027 is the Employer’s Annual Information Return of Tip Income and Allocated Tips. Publication 15 says a large food or beverage establishment files it. That shop is in the 50 states or the District of Columbia. It serves food or beverages to be eaten or drunk on the premises. Tipping is customary there. On a typical business day in the prior year, it normally had more than 10 employees.

The IRS tip recordkeeping page says you allocate tips when the tips workers reported are under 8 percent of gross receipts, or under a lower percent the IRS approved. Allocated tips go in box 8 of Form W-2. Publication 15 says not to withhold income tax, Social Security tax, or Medicare tax on allocated tips.

Form 8846 is the Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips. The IRS says certain food and beverage establishments use it to claim a credit for Social Security and Medicare taxes the employer paid on certain workers’ tips. The credit is part of the general business credit. That credit is a group of business tax credits claimed on the business return. It is not a reason to skip your employer share during the year.

The methodology page explains the three grades. Publication 15 says you stay responsible if a payroll service misses a deposit or a return. Gusto is one plain link. Patriot is the other service on this site.