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Tipped Minimum Wage: the 2023 Update

Jan 05, 2023

The start of the year heralds changes to many minimum wage rates across the country.  As such, those of us in the restaurant industry perk up any time a state mentions any sort of minimum wage hike…or change to its state tipped minimum.  But, first, what is the tipped minimum wage?

The tipped minimum wage is the lower hourly wage rate that employers are permitted to pay to workers who receive tips, like restaurant servers and bartenders.  According to the U.S. Department of Labor, tipped workers include all workers who customarily and regularly receive more than $30 a month in tip earnings.

[For those readers already familiar with the ins and outs of the minimum wage in restaurants and just want the 2023 updates – feel free to skip ahead to the section “The Tipped Minimum Wage in 2023”]

If you’re a restaurant owner or manager, communicating the expectations of your workers’ employment to them is crucial.  This means knowing the minimum wage on your state and federal level – while keeping up to date on any minimum wage increase that would affect your restaurant and employees.  One of the most effective ways to communicate payroll and employment expectations is an Employee Handbook.  You can download a free template of one below.

The Federal Minimum Wage

In the US, the federal tipped minimum wage is currently $2.13 per hour, though some states have higher rates.  So, how does the federal government insure that tipped employees throughout the country don’t receive a subminimum wage?

Well, they require the employer (a la restaurant owner) of a tipped worker to make up the difference in pay if the workers’ tips combined with the federal tipped minimum are less than the federal minimum wage.  Currently the federal minimum wage if $7.25 per hour.  As tipped workers receive most of their tips in cash, employers must declare a portion of these tips to the federal government through their payroll.  This system of tipped workers getting paid a cash wage that is lower than the minimum wage is also referred to as a tip credit.

The tip credit varies state by state, so let’s take a closer look at the differences among the them with respect to the required pay for tipped employees.

 

State Minimum Wage

Looking at the relationship between wages and tips within states, let’s begin with those states that do not allow a tip credit.  As of 2023 – Alaska, California, Minnesota, Montana, Nevada, Oregon and Washington do not allow a tip credit.  This means that – in each state mentioned above – all businesses must pay their employees (whether or not they’re tipped employees) the state minimum wage.

For states that allow the tip credit system, each state must set its own maximum tip credit – which combines with its minimum cash wage (or state tipped minimum) to make up the basic combines minimum wage in that state.  While some states (like Alabama, Kentucky, Louisiana, etc.) follow the federal government with a $2.13 tipped minimum and a $5.12 maximum tip credit, most other states set their own tipped minimum and maximum tip credit.  Some states with the highest combined tipped minimum and and tip credit include New York, Washington D.C. and Massachusetts.

However, many changes to state minimum wages and tipped minimum took effect to start 2023 and more are coming later this year.  Let’s explore these changes in wages.

 

The Tipped Minimum Wage in 2023

Starting on January 1, 2023 – each state listed below has increased its state minimum wage – which is the first pay rate listed.  For those states that have enacted growth to their tipped minimum, that new pay rate is listed in the second position.  The following data on minimum wage and tipped minimum increases come from CNN and NPR

  • Alaska* – $10.85
  • Arizona –  $13.85 | $10.85
  • California* – $15.15
  • Colorado –  $13.85 | $10.63
  • Delaware –  $11.75
  • Washington D.C. – $16.10 | $6.00
  • Illinois – $13.00 | $7.80
  • Maine – $13.80 | $6.90
  • Maryland – $13.25
  • Massachusetts – $15.00 | $6.75
  • Michigan – $10.10 | $3.84
  • Minnesota* – $10.59
  • Missouri – $12.00 | $6.00
  • Montana* – $9.95
  • Nebraska – $10.50
  • New Jersey – $14.13 | $5.26
  • New Mexico – $12.00 | $3.00
  • New York – $14.20 | $9.45
  • Ohio – $10.10 | $5.05
  • Rhode Island – $13.00
  • South Dakota – $10.80 | $5.40
  • Virginia – $12.00
  • Washington* – $15.74
  • Ohio – $10.10 | $5.05

Coming Later in 2023:

  • Connecticut – $15.00
  • Florida – $12.00
  • Nevada* – $11.25
  • Oregon* – $13.50

* = state does not allow tipped minimum

Frequently Asked Questions: Tip, Tipped Minimum & Wages Edition

What is the lowest tipped minimum wage?

The lowest tipped minimum rate is $2.13 per hour – which is the floor that the federal government has set for all states.


What do servers and restaurant workers think of the tip credit?

Tipped employees – like servers and bartenders – have expressed both positive and negative sentiments about the tip credit.  In a survey conducted by Professors Bagdan and Warrener from Johnson & Wales University, 89 percent of their respondents wanted to keep working for tips. One reason given by these respondents is that they worry when customers learn servers are receiving the general minimum wage customers, they will either stop tipping or greatly decrease the amount of cash tips they leave.

Opponents of tip culture in restaurants cite its possible propagation of inequality, racial discrimination and sexual harassment.  They also argue that workers paid within the tipped system receive lower and more unreliable pay, on average compared to their minimum wage counterparts.


What do restaurant owners and managers think of the tip credit?

Again you’ll find owners on both sides of the tip debate.  However, it research seems to show that managers are in favor of the tip credit.  Going back to a survey conducted by Bagdan and Warrener, 72 percent of managers were not in favor of eliminating the tipped wage.  So, why are owners and managers mostly in favor of tipped wages?

The primary reason is labor cost.  Labor costs are already between 25-35 percent of sales for most restaurants.  Owners argue that increases in minimum wages and tipped minimums will further cut into their razor-thin margins.

Other owners and proponents of the tip credit cite the effect eliminating the tips from restaurant pay will have on the guest experience.  In a study by Michael Lynn and Zachary Brewster, they found “(i) restaurants receive lower online customer ratings when they eliminate tipping, (ii) online customer ratings decline more when tipping is replaced with service-charges than when it is replaced with service-inclusive-pricing, and (iii) less expensive restaurants experience greater declines in online customer ratings when replacing tipping with either alternative than do more expensive restaurants.”


What is the history of tipping, the tip credit and tipped minimum?

The origins of the tipping are debated.  Some go back to Roman times to find its European source.  Others attribute the birth of tipping to Tudor England around the 16th century. For the U.S., tipping was imported from Europe around the time of the Civil War – primarily among aristocratic circles.  Tips became more widespread during Prohibition when sales were down for restaurants.  By the 1960s, tips became a formalized aspect of American culture.

In terms of the tip credit and tipped minimum, the IRS became involved in 1965 when employers were required to withhold Federal Insurance Contributions Act (FICA) tax on tips from employees’ pay.  In 1982, federal law required employees to report at least 8% of gross sales as tips.  The FICA tip credit was officially enacted in 1993.  This was the federal establishment of the tip credit.  At the same time, the federal government rolled out the Tip Rate Determination/Education Program (TRDEP) – encouraging employees to report the correct amount of tip income to their employer.

To learn more about recent developments in tip culture, check out our blog on the subject.