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Seven states — California, Oregon, Washington, Minnesota, Alaska, Montana, and Nevada — do not allow the tip credit. In these states, employers must pay tipped employees the full state minimum wage, regardless of how much the employee earns in tips. This changes the payroll setup significantly: there’s no cash wage below minimum, no makeup pay calculation, and no tip credit to claim. But tip reporting and tax obligations don’t disappear — they shift in how they work.
Here’s what hospitality operators need to know about running payroll for tipped employees in no-tip-credit states.
Last updated: June 2026
What Changes When There’s No Tip Credit
The most significant operational change is wage structure. In tip credit states, operators pay servers and bartenders a reduced cash wage — as low as $2.13 federally — and tips bring them to the applicable minimum. In no-tip-credit states, every employee earns at least the full state minimum wage from the employer before tips are counted. For California, where the minimum wage is $16.50 and rising, this means a full-service restaurant is paying its entire front-of-house staff full minimum wage as the floor — and those employees also earn tips on top of that wage.
For payroll configuration, this means: no reduced tipped wage rate, no minimum wage makeup calculation, and no FLSA tip credit notation. The employee’s hourly rate in the system should simply be the state minimum wage or the agreed wage above it. Tips don’t factor into the wage calculation at all from the employer’s payroll perspective — they’re separate compensation that the employee receives directly from guests.
Tip Reporting Still Applies
Eliminating the tip credit doesn’t eliminate tip reporting requirements. Employees in no-tip-credit states are still required to report cash tips to their employer for tax purposes. Employers are still required to withhold income tax and the employee’s share of FICA on reported tips. Charged tips — added to credit card bills — still flow through the employer’s payment system and must be treated as wages for withholding and reporting purposes.
The difference is that in no-tip-credit states, the FICA tip credit (IRS Section 45B) — which allows employers to claim a credit for the employer’s share of FICA taxes paid on tips above the minimum wage — may still be available. The credit applies to the portion of tips that exceed what would be needed to bring the employee to federal minimum wage. In states where employees are already paid above federal minimum wage by the full state minimum, the credit calculation is based on the federal minimum wage floor, not the state rate.
How to Set Up Payroll in No-Tip-Credit States
Step 1: Configure the Correct Wage Rate
Set each tipped employee’s hourly rate at or above the applicable state minimum wage. Do not use a tipped wage rate. There is no “tipped wage” in California, Oregon, Washington, Minnesota, Alaska, Montana, or Nevada — the standard wage applies to all employees regardless of tip eligibility.
Step 2: Set Up Tip Reporting
Establish a tip reporting process for cash tips — either a daily log, a weekly reporting system, or electronic tip reporting through an employee self-service portal. Employees are legally required to report cash tips to their employer. The employer is then responsible for withholding on reported amounts in the next pay cycle.
Charged tips should be set up as a separate earnings code in payroll — distinct from regular wages — so they can be tracked separately for W-2 reporting. Box 8 of the W-2 is used for allocated tips; Box 7 for social security tips. Your payroll system should handle this automatically if configured correctly.
Step 3: Configure FICA Withholding on Tips
Tips are subject to Social Security and Medicare taxes — both the employee’s share and the employer’s share. The employer must withhold the employee’s FICA on reported and charged tips and pay the employer’s FICA. In some pay periods where reported tips are high and regular wages are insufficient to cover all withholding, the employer may be unable to collect the full employee FICA — this is reported to the IRS and is not the employer’s liability to cover.
Step 4: Evaluate the Section 45B FICA Tip Credit
Consult with your tax advisor or CPA about whether your operation qualifies for the employer FICA tip credit under IRS Section 45B. This credit offsets the employer’s share of FICA taxes on tips that exceed the federal minimum wage — which, in no-tip-credit states where employees are paid above federal minimum, may still produce a meaningful credit. The calculation is done on IRS Form 8846 and flows through to the business tax return.
Tip Pooling in No-Tip-Credit States
In no-tip-credit states, federal law permits including back-of-house employees (cooks, dishwashers) in mandatory tip pools — because the employer is not taking a tip credit. However, some states impose their own restrictions on tip pooling regardless of federal rules. California, for example, has specific rules about tip pool participation that differ from the federal standard. Operators should verify their state’s tip pooling rules before including back-of-house employees in a mandatory pool.
Managers and supervisors remain excluded from tip pools under all circumstances, as under federal law.
Multi-State Operators: Configuration by Property
Hotel groups and restaurant chains with properties in both tip credit and no-tip-credit states must configure payroll separately for each state. The same server role may use the tipped wage rate in Texas and the full minimum wage in California. Applying a uniform configuration across all properties — either always using tip credit or never using it — will create wage and hour liability in the states where the wrong approach is applied.
Netchex supports state-specific payroll configuration for multi-location operators, so tip credit rules, wage rates, and withholding are applied correctly at the property level regardless of what’s happening at other locations. Learn more about Netchex payroll for hospitality operators.
Frequently Asked Questions
As of 2026, the states that do not permit the FLSA tip credit are California, Oregon, Washington, Minnesota, Alaska, Montana, and Nevada. In these states, employers must pay all employees — including tipped employees — at least the full state minimum wage before tips. The state minimum wage in each of these states exceeds the federal minimum, so the applicable rate is the state rate.
Yes. Tip reporting requirements are federal and apply regardless of whether the state allows the tip credit. Employees are required to report cash tips to their employer. Employers are required to withhold income tax and FICA on reported tips and to process charged tips through payroll as wages. The absence of a tip credit changes the wage structure, not the reporting obligations.
Under current federal law, employers who do not take the tip credit may include back-of-house employees in mandatory tip pools. However, state law in some no-tip-credit states — including California — imposes additional restrictions on tip pooling that may prohibit or limit this practice. Always verify the specific state rules before including kitchen staff in a mandatory pool.
The Section 45B credit allows food and beverage employers to claim a tax credit for the employer’s share of FICA taxes paid on employee tips above the federal minimum wage. It is a federal credit and is separate from the FLSA tip credit — the 45B credit is about tax reduction for the employer, not about paying a reduced wage to the employee. It can apply in no-tip-credit states, since employees in those states still receive tips on which FICA is owed. The calculation uses the federal minimum wage as the baseline, not the state minimum. Consult a CPA for the specifics of your situation.
Operating in Multiple States With Different Tip Rules?
Netchex supports state-specific payroll configuration so tip credit rules, wage rates, and withholding are applied correctly at each property regardless of where it operates.
This guide reflects publicly available product information and independent reviewer data (G2, Capterra, Trustpilot, Yelp, Better Business Bureau, Reddit, Software Advice, GetApp) as of 2026. Feature availability and pricing may vary by plan. Contact each provider for current details.
Disclaimer: Any product roadmap or future plans provided herein are for informational purposes only. They do not represent a commitment to deliver any material, code, feature, or functionality. Plans may change without notification. The development, release and timing of any features or functionality described remain at the sole discretion of Netchex, its affiliates, and partners. Netchex does not give legal, tax, or accounting advice. You are responsible for ensuring your use of Netchex product meets your individual business and compliance requirements.
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