Indiana tip laws follow the federal framework: an employer can pay a tipped employee as little as $2.13 per hour in direct wages, as long as tips bring total pay up to the $7.25 minimum wage. If tips fall short in any pay period, the employer owes the difference. The ground rules sit in Indiana Code 22-2-2-4 and the federal Fair Labor Standards Act, and together they govern how tips are earned, pooled, deducted from, taxed, and protected.1Indiana General Assembly. Indiana Code 22-2-2-4 – Rates; Discrimination
How the Tip Credit Works
The state minimum wage is $7.25 per hour. The required cash wage for a tipped employee is $2.13. The gap, $5.12, is the maximum tip credit an employer can claim per hour worked. If a server pulls in at least $5.12 an hour in tips, the $2.13 cash wage satisfies the law. If tips come up short in a given pay period, the employer must top up the paycheck so every hour clears $7.25.
This is not an estimate. The statute requires employers to support the tip credit with reported tips, which means tracking actual tip income per employee per pay period against hours worked. Restaurants that lean on rough averages, or assume tips always cover the credit, are the ones that end up defending wage claims.
The Notice You Should Receive Before the Credit Applies
An employer cannot take the tip credit until the employee has been told how it works. Before the credit kicks in, federal law requires the employer to communicate the direct cash wage amount (at least $2.13), the tip credit amount being claimed (up to $5.12), that the credit cannot exceed tips actually received, that all tips belong to the employee except for a valid pool, and that the credit is forfeited if any of this information is withheld. The notice can be oral or written, though a written notice creates the paper trail. An employer who skips this step loses the right to any tip credit and owes the full $7.25 per hour in direct wages.2U.S. Department of Labor. Fact Sheet #15: Tipped Employees Under the Fair Labor Standards Act (FLSA)
When an employer fails to make up the gap between tips and $7.25, it owes the unpaid wages. Federal law can double that: courts can award liquidated damages equal to the full amount of unpaid wages.3GovInfo. 29 USC 216 Doubling is the default. An employer avoids it only by convincing the court it acted in good faith with reasonable grounds for believing its pay practices were legal, a bar few clear when basic tip-credit tracking was missing.
Tip Pooling
Tip pools are legal in Indiana, but the rules shift depending on whether the employer takes the credit. When the employer pays only $2.13 and claims the credit, the pool is limited to employees who customarily and regularly receive tips: servers, bartenders, bussers. When the employer pays the full $7.25 and takes no credit, the pool can include back-of-house workers like cooks and dishwashers.4eCFR. 29 CFR 531.54 – Tip Pooling
One rule holds across both scenarios. Managers and supervisors cannot receive tips from a pool, and the employer itself cannot keep any portion of employees’ tips for any purpose.5Office of the Law Revision Counsel. 29 USC 203 – Definitions A manager who also tends bar during a shift is still excluded from the pool. The only tips a supervisor can keep are those a customer hands them directly for a service the supervisor personally and solely provided.
Everyone in the pool should know the contribution formula before the shift starts, and pooled tips must be redistributed within the same pay period they were collected. An employer found to be mismanaging the pool risks losing the tip credit entirely.
Overtime When You’re Paid With a Tip Credit
Tipped employees get overtime at time-and-a-half for hours over 40 in a workweek. The calculation trips up employers because the overtime rate is based on the full minimum wage, not the $2.13 cash wage.
Multiply $7.25 by 1.5 to get $10.88. Subtract the $5.12 tip credit. The employer owes $5.76 in cash for each overtime hour. Tips still need to bring the total up to at least $10.88 per overtime hour, and if they don’t, the employer covers the shortfall.6eCFR. 29 CFR 531.60 – Overtime Payments A common error is paying 1.5 times $2.13, which comes out to $3.20. That significantly underpays tipped workers and builds up substantial back-pay liability.
Side Work and the Dual Jobs Rule
Tipped employees spend part of their shifts on tasks that don’t directly produce tips: rolling silverware, refilling condiments, wiping down tables. The question of when the employer can still pay the tipped rate for that work has been a moving target. The Department of Labor’s 2021 rule, which capped non-tipped duties at 20 percent of a workweek or 30 consecutive minutes, was vacated by a federal appeals court in 2024 and formally removed from the regulations that December.7Federal Register. Tip Regulations Under the Fair Labor Standards Act (FLSA)
The older “dual jobs” regulation is back in force. An employer can pay the tipped rate for duties related to the tipped occupation, without any specific time limit. A server who makes coffee, sets tables, or stocks supplies is still working their tipped job, and the credit applies. But an employee who performs a genuinely separate non-tipped job for the same employer, like maintenance work or stockroom duty, must be paid the full $7.25 for those hours. The test is whether the work is a separate occupation, not how many minutes a task takes. In restaurants where employees wear multiple hats, timekeeping should distinguish between the tipped role and any separate non-tipped role.
What Can Come Out of Your Tips and Wages
Every tip belongs to the employee who earned it, whether paid in cash or on a card. The employer handles card tips as a pass-through and has no ownership claim on any portion.5Office of the Law Revision Counsel. 29 USC 203 – Definitions
Credit card processing fees are the one recognized exception. When the bank charges the business a percentage to process a transaction, the employer can deduct that same percentage from the tip. On a $20 card tip with a 3 percent fee, the employer can withhold $0.60 and pay out $19.40. A standard composite rate across transactions is allowed, as long as the total deducted doesn’t exceed the actual fees charged.8U.S. Department of Labor. Wage and Hour Division FLSA2006-1 Even with this deduction, total hourly compensation cannot drop below $7.25. If subtracting the fee would push the worker under the minimum, the employer absorbs it.
Beyond card fees, the limits on deductions are tight. Cash register shortages, customer walkouts, and broken dishes are costs of doing business. Under the FLSA, deducting those losses from wages is illegal whenever the deduction would bring pay below minimum wage or cut into overtime. Uniform costs follow the same logic. Required clothing is the employer’s business expense; the cost can be passed to the employee only if doing so doesn’t push any workweek’s pay below $7.25 per hour or eat into overtime. Spreading the cost across paychecks is allowed, but every paycheck still has to clear the floor, and an employer can’t sidestep the rule by requiring the employee to buy the uniform in cash.9U.S. Department of Labor. Deductions From Wages for Uniforms and Other Facilities Under the Fair Labor Standards Act
Mandatory Service Charges Are Not Tips
A mandatory service charge, like the automatic 18 percent some restaurants add for large parties, looks like a tip on the receipt but is treated differently. Because the customer doesn’t choose the amount, service charges belong to the employer as regular business revenue. The employer decides whether to pass any of it to the staff, and whatever is distributed counts as wages rather than tips. That means it goes through regular payroll for tax withholding, overtime calculations, and recordkeeping.10Internal Revenue Service. Tips Versus Service Charges: How to Report
Service charge payouts also don’t count toward the tip credit. A restaurant that leans heavily on mandatory service charges instead of voluntary tips still owes the full $7.25 in cash wages, because the $5.12 credit only applies to actual tips. Indiana’s 7 percent sales tax may apply to mandatory service charges, since the state generally treats them as part of the sale price, while voluntary tips remain exempt.
Reporting Your Tips for Taxes
If you receive $20 or more in cash tips in a calendar month from a single employer, you have to report the total to that employer by the 10th of the following month. This is on you, not the employer. Card tips are already captured by the payment system, but cash goes unreported unless you document it.11Internal Revenue Service. Tip Recordkeeping and Reporting
Your employer uses the reported amount to withhold federal income tax, Social Security, and Medicare. Underreporting isn’t just a tax-time problem. It lowers your reported income for future Social Security benefits and can trigger IRS penalties for both the worker and the business. A daily tip log is the simplest way to stay ahead.
Filing a Wage Claim in Indiana
If you believe you’ve been shorted on wages or tips, you can file through the Indiana Department of Labor’s online wage claim form. There’s no attorney required and no filing fee. The department contacts the employer, who has two weeks to pay or dispute the claim. If the employer doesn’t respond, a final notice goes out with one additional week. If the dispute isn’t resolved after that, the department sends the file back to you with a recommendation to consult an attorney or pursue the matter in court.12Indiana Department of Labor. Online Wage Claim Form
The state describes this as a service to help resolve disputes, not a guarantee of payment. For federal minimum wage or tip credit violations, you can also file with the U.S. Department of Labor’s Wage and Hour Division, which has its own enforcement authority. The FLSA statute of limitations for back pay is two years from the date of the violation, or three years if the violation was willful.
You Can’t Be Punished for Raising a Wage Issue
Federal law makes it illegal for an employer to fire, demote, cut hours, or otherwise punish an employee for filing a wage complaint, cooperating with a Department of Labor investigation, or testifying in a wage-related proceeding.13Office of the Law Revision Counsel. 29 USC 215 The protection applies from the moment you raise the concern, not just after a formal filing. An employer who retaliates picks up additional liability on top of whatever the original violation was worth.