Federal Tipped Minimum Wage 2026: State Rates, Tip Credits, and New IRS Rules

• The federal tipped minimum wage remains $2.13 per hour in 2026 -- unchanged since 1991. The standard federal minimum wage is still $7.25, and the maximum tip credit is $5.12.
• Over 30 states now require a higher tipped minimum wage than the federal baseline. Seven states ban the tip credit entirely.
• The DOL's 80/20/30 rule was vacated by the 5th Circuit and officially withdrawn. You no longer need to track side-work minutes. The "dual jobs" standard applies instead.
• Starting with tax year 2026, the IRS requires new W-2 codes: Box 12 Code TP (qualified tips), Box 12 Code TT (overtime premium), and Box 14b (Treasury Tipped Occupation Code). The 2025 grace period is over.
• Employees can deduct up to $25,000 in qualified tips from federal income tax under the OBBBA. FICA still applies to every dollar.

The federal tipped minimum wage for 2026 is $2.13 per hour. That's the same rate it's been for 35 years. In that time, the regular federal minimum wage hasn't budged either -- it's been $7.25 since 2009, losing roughly 30% of its purchasing power to inflation.

But here's what is different in 2026: the federal government overhauled how tipped income gets taxed, reported, and tracked. The One Big Beautiful Bill Act (OBBBA) created a $25,000 tip deduction for employees. The IRS redesigned the W-2 form. And the Department of Labor killed one of the most hated compliance rules in the restaurant industry.

If you run a tipped business and your compliance playbook hasn't changed since last year, it's already outdated.

The tip credit is the FLSA mechanism that allows you to pay tipped employees less than the standard minimum wage, using their tips to cover the difference.

The math: you pay $2.13, the employee's tips cover the $5.12 gap, and altogether they must average at least $7.25 per hour for the workweek. If tips fall short, you owe the difference. This "make-up" obligation is calculated workweek by workweek, not per shift.

But the federal floor is increasingly irrelevant. More than 30 states now mandate higher tipped wages. Seven states prohibit the tip credit entirely. See the complete breakdown in our tipped minimum wage by state 2026 guide.

When state and federal laws differ, you follow whichever is most favorable to the employee. Period.

The country breaks down into three distinct groups. Here's a consolidated reference table covering key states from each category (see the full tipped minimum wage by state 2026 guide for all 50 states):

If you operate across state lines, your payroll system must account for every jurisdiction's specific rates. When state and federal rules conflict, you follow whichever is most favorable to the employee.

For years, the DOL's 80/20 rule -- expanded in 2021 to the 80/20/30 rule -- required employers to track every minute a tipped employee spent on non-tipped side work. If a server spent more than 20% of their week rolling silverware or more than 30 consecutive minutes on side duties, you lost the right to claim the tip credit for that time.

That's over.

In August 2024, the 5th U.S. Circuit Court of Appeals vacated the rule entirely in Restaurant Law Center v. United States Department of Labor. The DOL officially withdrew the rule in December 2024.

What applies now: the "Dual Jobs" standard. You can apply the tip credit to time spent on duties that support tip-producing work, as long as those tasks are reasonably related to the primary tipped occupation. No more tracking minutes or percentages for side work.

What you can do: Pay a server $2.13 while they roll silverware, wipe tables, and prep garnishes -- as long as these tasks are part of their server role.

What you cannot do: Pay someone $2.13 when they're spending their shift doing a completely separate, non-tipped job.

The practical takeaway: document your job descriptions so tipped and non-tipped roles are clearly separated. If someone does dual roles, your timekeeping system needs to track those shifts separately.

The base wage didn't change. The tax reporting changed dramatically.

The OBBBA, signed July 4, 2025, created two new federal income tax deductions:

• Tip deduction: Employees can deduct up to $25,000 in qualified tips annually
• Overtime deduction: Employees can deduct up to $12,500 in FLSA overtime premiums ($25,000 for joint filers)

Both deductions phase out above $150,000 MAGI ($300,000 for joint filers) and run from 2025 through 2028.

Your employees get the tax break. Your payroll department gets the paperwork. For a complete walkthrough of employer requirements, read no tax on tips: what employers need to do in 2026.

The IRS finalized the redesigned Form W-2 in January 2026. New required fields:

Box 12, Code TP -- Total qualified tips. Only voluntary, customer-determined tips count. Auto-gratuities and mandatory service charges are excluded. Use the tip qualifier or read auto-gratuity vs. voluntary tips.

Box 12, Code TT -- Qualified overtime premium. Only the "half" of time-and-a-half.

Box 14b -- Treasury Tipped Occupation Code (TTOC). A three-digit code identifying the employee's tipped occupation. Find codes with the TTOC Code Finder or see the full occupation codes list.

No penalty relief in 2026. An incorrect or incomplete W-2 triggers $60 to $680 per form in penalties.

Step 1: Confirm your state's rules. Federal law is the floor, not the ceiling. Match your cash wage to whichever standard -- federal, state, or local -- is highest.

Step 2: Kill the minute-tracking. If you're still timing side work under the old 80/20/30 rule, you can stop. But clearly document which job roles are tipped and which are not.

Step 3: Audit your POS for tip vs. service charge separation. Your Code TP on the W-2 must reflect only voluntary tips.

Step 4: Assign TTOCs to every tipped position. Map each role to the IRS's three-digit code and configure your payroll system to populate Box 14b.

Step 5: Isolate the overtime premium. Your payroll must track the "half-time" premium separately for Code TT on the W-2.

Step 6: Confirm payroll software readiness. Ask your provider: "Can you populate Box 12 Code TP, Box 12 Code TT, and Box 14b on 2026 W-2s?" If the answer isn't a definitive yes, you have a problem to solve now.

You own a small restaurant group with locations in Austin, Texas and Denver, Colorado. One server works at both locations during the year.

Austin (federal baseline):

• Cash wage: $2.13/hr
• Tip credit: $5.12
• Overtime cash wage: $5.76/hr

Denver (Colorado modified tip credit):

• Cash wage: $12.14/hr
• Tip credit: $3.02
• Overtime cash wage: $20.72/hr ($15.16 × 1.5 - $3.02)

Same employee, same job title, wildly different payroll math. And both locations need the same W-2 fields: Code TP, Code TT, and Box 14b with TTOC 101.

For detailed overtime calculation scenarios, see our complete guide on overtime for tipped employees.

Applying the wrong state's tip credit. Wages follow the employee's physical work location. If a catering team crosses from Indiana to Illinois for an event, Illinois rates apply for that event.

Forgetting the make-up obligation during slow periods. You owe the shortfall every single workweek tips fall short -- not just on average.

Confusing the end of the 80/20 rule with a free pass on side work. The dual jobs standard still applies. You can't pay a janitor-turned-server $2.13 for a full janitorial shift.

Assuming "no tax on tips" means no withholding. It doesn't. You withhold FICA on every dollar of reported tips. The deduction is on the employee's personal tax return.

Not filing for the FICA tip credit (Section 45B). If you pay tip-credit workers and report their tips, you may be eligible for a federal business tax credit on the employer portion of FICA taxes paid on tip income above the minimum wage.

What is the federal tipped minimum wage for 2026? $2.13 per hour. This rate has not changed since 1991. With the $5.12 maximum tip credit, the employee's total compensation must reach $7.25 per hour for the workweek.

Did the "no tax on tips" law eliminate taxes on tip income? No. The OBBBA created a federal income tax deduction of up to $25,000 for qualified tips. Tips remain fully subject to Social Security and Medicare (FICA) taxes.

What is the 80/20 rule for tipped employees in 2026? It no longer exists. The 5th Circuit vacated it in 2024, and the DOL officially withdrew it. Employers now operate under the "dual jobs" standard.

Which states completely ban the tip credit? Seven states: Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington.

Are mandatory service charges considered tax-free tips in 2026? No. Auto-gratuities and mandatory service charges are classified as wages, not tips. They don't qualify for the OBBBA tip deduction.

How is overtime calculated for a tipped employee using a tip credit? Multiply the full minimum wage (not the cash wage) by 1.5, then subtract the tip credit. Federally: $7.25 × 1.5 = $10.88 - $5.12 = $5.76 per overtime hour.

What are TTOCs and do I need them? Treasury Tipped Occupation Codes are three-digit IRS codes identifying tipped occupations. Starting in 2026, you must report the correct TTOC in Box 14b of every tipped employee's W-2.

Run through TipFort's free compliance checklist to verify your payroll, POS, and W-2 configuration before your next filing deadline.

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