If a Server Is Only Paid $2.13 an Hour, Does the Restaurant Have to Pay Employment Taxes on Their Tips?

The topic of tipped employees and their minimum wage in the United States is a complex and often controversial one. According to federal law, if a server's tips bring their hourly earnings to at least the federal minimum wage of $7.25, then their base wage can legally be as low as $2.13 per hour. This system is designed to ensure that servers earn a fair wage when including their tips.

Understanding the Tipped Minimum Wage

In the U.S., tipped employees like servers, bartenders, and hairdressers are subject to a special minimum wage rate due to the variability of their income. As of August 2023, the federal minimum wage is $7.25 per hour. However, these employees can be legally paid a cash wage of $2.13 per hour as long as their tips cover the remaining amount to meet the federal minimum wage. This arrangement is possible because federal law allows employers to credit employees' tips to offset the difference.

Employment Taxes and Tips

Despite the legal framework allowing for lower base wages, there are still tax obligations that restaurants must adhere to when it comes to tips:

Tip Reporting

According to the Internal Revenue Service (IRS), servers are required to report all of their tips to their employer. If the total tips reported by the server exceed $20 in a single month, they are legally obligated to provide a tip report to their employer.

Tax Withholding

The employer is responsible for withholding Social Security and Medicare taxes from both the cash wage and the reported tips. The employer must also match and pay their portion of these taxes to the government.

Income Taxes

Tips are considered taxable income. Therefore, servers are responsible for claiming their tips on their personal tax returns. The IRS requires that individuals include all tips received as part of their income for tax purposes.

The Controversy Surrounding the $2.13 Minimum Wage

Some argue that the $2.13 minimum wage for tipped employees is a national disgrace. According to the Bureau of Labor Statistics, as of 2023, 17 states still adhere to this minimum wage. This system has been criticized for multiple reasons, including the potential for employers to misinterpret or mismanage the credit of tips, leading to financial struggles for employees and unfair practices.

Employer Responsibility and Mismanagement of Tips

There are cases where employers do not credit tips to meet the minimum wage, or worse, steal tips from employees. A government report, the list of which can be found here [Insert link], details the tipped minimum wage by state. In states with lower minimum wages, employees may be especially vulnerable to such practices. It is crucial for servers to be aware of the potential risks and to tip generously and in cash, ideally in a manner that leaves a positive lasting impression on the business.

The Voice of an Expert

As an expert in tax law and employment regulations, my advice is clear. While the legal framework allows for a lower base wage under the condition that tips make up the difference, the responsibility remains with employers to ensure that this provision is adhered to. If an employer does not meet their legal obligations, they can face severe penalties from the IRS and other regulatory bodies. The well-being of tipped employees should always be the priority.

In my professional opinion, the current legal framework is a necessary but flawed system. Ideally, all states should ensure that tipped employees receive a fair wage, either directly or through a minimum wage that inherently includes tips. Until that change is made, it is important for employees to take extra precautions and for employers to comply fully with their duties.

For anyone working in a tipped position, it is crucial to understand the legal system and your rights. Staying informed and aware can help prevent exploitation and ensure a fair working environment. If you have any specific questions or concerns about your employment status or tax obligations, consulting a professional or seeking guidance from the relevant government agencies is highly recommended.