What is Tip Credit?
Here's the basic idea, if you run a restaurant, you're allowed to pay servers and bartenders less than minimum wage in cash, as long as their tips cover the rest. Say the minimum wage where you operate is $12 an hour. If the law allows a $5 tip credit, you can pay $7 an hour directly and count on tips to fill in that last $5. Sounds simple, but there's a catch. If someone has a slow night and their tips don't add up to that missing $5, you're on the hook to pay it yourself.
Not every state plays by the same rules here. Some don't allow tip credits at all, and the ones that do often set different limits. So if you've got locations in more than one state, you can't just copy the same pay structure across the board.
This is why payroll software tends to take care of it, flagging any gaps before they become a compliance headache. Most owners don’t want to sit there doing this math manually every pay period. And it’s something you really want to pay attention to, because screwing up a tip credit is not just an uncomfortable discussion with an employee. It can mean fines, back pay, and a mess you don’t want.