One reoccurring gaffe made by owners of small businesses is failing to compensate their tipped workers the accurate wage. Things can get tricky when it relates to reimbursing tipped workers for overtime. If you want to avoid liability and stay in compliance, you must understand how to determine overtime pay for tipped workers.

Simply put, overtime pay is one and a half times the employee‘s regular wage. If you have nonexempt employees, you will be expected to pay them overtime. Overtime pay is required under federal law for workers who put in more than 40 hours a week.

What is a Tipped Employee?

A tipped employee is a worker who receives more than $30/month in tips, as defined by the FLSA. The Fair Labor Standards Act (FLSA) is a federal statute that defines minimum wage, overtime, as well as other labor requirements that are applicable to both public and private sectors.

The national minimum wage as of now is $7.25/hour, and this is the least hourly wage you can pay a worker. Businesses in certain industries (for instance, Foodservice industry) are allowed to pay qualified workers who earn tips a reduced minimum wage.

It should be noted, nevertheless, that not every state works with the federal tipped minimum wage rate, and some states mandate businesses to reimburse a tipped minimum wage that is higher than the national minimum wage rate. In Alabama, for instance, the tipped minimum wage is $2.13 per hour, while in Iowa, the tipped minimum wage is $4.35 per hour. Also, keep in mind that minimum wage rates can fluctuate over the years.

How to Calculate Overtime for Tipped Employees

If a tipped worker is entitled to the $2.13 minimum wage for tipped workers, the method for determining overtime pay is as follows:

  1. Determine the particular hourly overtime pay rate using the general minimum wage (not the minimum wage for tipped employees). This amount is $7.25 multiplied by 1.5 to equal $10.88 per hour.
  2. Deduct the hourly tip credit of the worker out of the general hourly overtime pay rate: $10.88/hour general overtime pay rate minus $5.12/hour tip credit equals $5.76/hour tipped employee overtime pay rate, supposing $2.13/hour non-overtime pay rate.
  3. Ascertain the number of working hours in overtime. If the employee has worked 50 hours in a given week, the overtime portion is 50 – 40 = 10 hours.
  4. Multiply the number of hours of overtime by the hourly overtime pay of the employee: 10 hours of overtime times $5.76 per hour equals $57.60.
  5. Keep in mind that the worker’s tip credit of $5.13/hour remains due unless it is counterbalanced by tips obtained during overtime work.

Tips to Avoid Mistakes When Calculating Overtime Pay for Tipped Employees

Calculating overtime pay and ensuring you pay tipped workers the right amount can be extremely confusing, especially for an inexperienced business owner. Nonetheless, here are vital tips to help you avoid mistakes.

  1. Learn who is qualified for overtime pay under federal law

Workers that are not exempt from overtime pay under the FLSA, are entitled to overtime pay. These employees are referred to as “nonexempt.”

They need only work more than 40 hours in a workweek to be eligible for overtime pay. Also, don’t forget that workers who are not covered by the FLSA’s overtime pay regulations are not entitled to overtime pay. These workers are also referred to as “exempt.”

  1. Determine overtime eligibility under state law

Some states institute their own overtime laws that vary from the FLSA’s overtime guidelines. For example, there are states with overtime requirements for nonexempt workers who work more than a specific amount of hours per day.

In some situations, the state can also mandate double-time pay, and a few states have additional overtime exemption laws. Howbeit, if a non-exempt worker is covered by both the FLSA and state overtime law, the legislation that benefits the worker more takes precedence.

  1. Note what goes into the regular pay rate

If you want to determine the overtime rate, you must first determine what your standard rate of pay is. If a regulation states that a specific type of pay ought to be excluded from the standard rate of pay, then you will have to subtract it from the calculation. Exclusions from the standard pay rate under the FLSA may include the following things:

  • Gifts prepared for special and August occasions, such as payments that are considered gifts
  • Paid vacation (e.g., vacation or holidays)
  • Business expenses that are refundable
  • Show-up (or reporting) compensation made sparingly or irregularly
  • Bonuses at one’s discretion
  • Contributions to profit-sharing plans
  • Non-FLSA premium payments made over time (e.g., hours worked on holidays or days off)
  1. Take into account all “hours worked” when calculating overtime

Overtime pay is calculated on the basis of the worker’s total amount of time worked during the week. Hours worked typically “includes all time an employee must be on duty, or on the employer’s premises, or at any other prescribed place of work,” according to the United States Department of Labor (DOL).

Whatever added time the worker is legally permitted (i.e., suffered or permitted) to work is also included. It should be noted that “hours worked” generally relates to the actual hours put in by the employee. When determining overtime and measuring hours worked, you might also have to point out the following:

  • Work done after work hours
  • Meal and rest breaks
  • Waiting period
  • Time spent on-call
  • Napping or other private pursuits
  • Meetings, seminars, and education programs
  • Time spent traveling
  • Traveling from home to work
  • Travel away from your hometown
  • Travel is all part of the job
  • From home to work: One-day special assignment in another city
  1. Combine time tracking and payroll

When trying to calculate overtime, problems are expected if the calculations are done manually or using divergent time-tracking and payroll systems. You can reduce these errors by automating your time-tracking and payroll mechanisms as well as combining them into a single unified platform.


If you want to avoid liability and stay in compliance, you must understand how to determine overtime pay for tipped workers correctly. Incorrect overtime calculations can annoy an employee, who was most likely, depending on the additional funds for an economic reason.

If you do not rectify the disagreement with the worker, they may submit an employment dispute or a civil suit against your business. If the worker comes out on top, you might be compelled to pay unpaid overtime wages, punitive damages, legal fees, and state-related sanctions.