Tipped employee payroll has more moving parts than regular hourly payroll. In Massachusetts, the rules are specific — and getting them wrong can mean wage theft liability. Here’s how it works.
The MA Tipped Minimum Wage
Massachusetts has two minimum wage rates:
- Standard minimum wage: $15.00/hr
- Tipped minimum wage (service rate): $6.75/hr
The tipped minimum wage applies to employees who customarily and regularly receive more than $20/month in tips — typically wait staff, bartenders, and certain service workers.
The Tip Credit
The difference between the standard and tipped minimum wage ($8.25/hr) is called the tip credit — the amount the employer is “credited” because the employee earns tips.
But there’s a catch: If an employee’s hourly wage plus tips doesn’t equal at least $15.00/hr, the employer must make up the difference. Always.
The Make-Up Pay Calculation
This is where most employers trip up. The calculation happens per pay period, not per shift.
Step 1: Calculate total hours worked in the pay period. Step 2: Multiply hours × $15.00 (minimum required total). Step 3: Add up all tips the employee actually received. Step 4: Add employer’s cash wage paid (hours × $6.75). Step 5: If (tips + cash wage) < (hours × $15.00), pay the difference.
Example — make-up pay required:
- Hours: 40
- Cash wage paid: 40 × $6.75 = $270.00
- Tips received: $350.00
- Total: $270 + $350 = $620
- Required minimum: 40 × $15.00 = $600
- $620 > $600 ✓ No make-up pay needed
Example — make-up pay required:
- Hours: 40
- Cash wage paid: $270.00
- Tips received: $290.00
- Total: $270 + $290 = $560
- Required minimum: $600
- Gap: $40 — employer must pay $40 additional
Withholding on Tip Income
Tips are taxable wages for federal and state income tax, Social Security, and Medicare. For payroll purposes, you have two components:
- Cash wages you pay (hours × $6.75) — process like any payroll
- Tips the employee received — must be reported and included in taxable wages
Employees must report their tips to you each pay period (typically on a tip reporting form or POS system). You then withhold taxes on the combined cash wages + reported tips.
FICA on tips: Both you and the employee owe FICA (Social Security 6.2% + Medicare 1.45%) on all tip income. You can claim a federal tax credit (Form 8846) for your share of FICA on tips that bring an employee above the minimum wage threshold.
FICA Tip Tax Credit (Form 8846)
This is a valuable credit many restaurant owners miss. You can claim a credit for employer FICA taxes paid on tips exceeding the federal minimum wage ($7.25/hr).
Credit = (Total tips − Hours × $7.25) × 7.65%
This directly reduces your federal income tax — not just a deduction, a dollar-for-dollar credit.
Overtime for Tipped Employees
Overtime for tipped employees is calculated on the full minimum wage, not the tipped rate. This is a very common mistake.
Wrong: $6.75 × 1.5 = $10.13 overtime rate Correct: $15.00 × 1.5 = $22.50 overtime rate (minus the tip credit)
In practice, the employee must receive at least $22.50/hr total (cash wages + tips) for overtime hours. The employer pays $15.00/hr cash for overtime (since the full tip credit can still be taken), and tips cover the remaining requirement.
Tip Pooling Rules
Massachusetts allows tip pooling among employees who “customarily receive tips.” This generally means:
- Servers, bartenders, bussers, food runners ✓
- Cooks, dishwashers, managers ✗ (cannot participate in tip pools)
Since 2021 (federal): Back-of-house employees (cooks, dishwashers) can be included in tip pools only if the employer does not take a tip credit — meaning all employees are paid full minimum wage. If you’re using the $6.75 tipped rate, tip pools must stay front-of-house.
Mandatory service charges (like an 18% auto-gratuity) are not tips — they’re wages owned by the employer. You can distribute them however you choose, but they’re subject to FICA as regular wages, not tips.
Record-Keeping Requirements
You must keep records of:
- Hours worked each day and week
- Cash wages paid each pay period
- Tips reported by each employee each pay period
- Make-up pay calculations and payments
The IRS recommends Form 4070 (Employee’s Report of Tips) or equivalent. POS system reports work well for this.
MA Service Employees vs. Other Tipped Workers
The Massachusetts tipped minimum ($6.75) specifically applies to “service employees” — those in food service and certain personal service industries. Not every worker who receives tips qualifies.
Examples of workers who likely don’t qualify for the tipped rate:
- Nail technicians (typically classified differently)
- Hotel housekeeping
- Delivery drivers (case-specific)
When in doubt, pay the standard $15.00 minimum and treat tips as supplemental income.
The OtterDesk payroll calculator supports tipped employee payroll for Massachusetts — enter the tipped rate, add reported tips, and it calculates withholding correctly on the combined wages.