You go out for dinner and drinks on a Saturday night, pay your bill, and leave a generous tip. It makes you feel good and you go home not feeling like a cheapskate. But do you know if it’s really enough for the worker to make ends meet? Or if they were able to keep all of the money you left as tip? Do you care?
Tipping is complicated. And with a rule proposed by the Department of Labor in December, it might get even more complex, and potentially unfair to people who work for tips.
The rule would make it legal for employers to keep their employees’ tips, as long as those employees make minimum wage.
So how exactly does tipping work? We break it down for you:
A note about the data: Averages were used for states with multiple minimum wage values broken down by specifications (Connecticut, California, New York, Nevada and Minnesota). Sources of the data include Bureau of Labor Statistics, Tax Foundation, Economic Policy Institute and Payscale.
What jobs rely most on tips?
Waiters, waitresses, bartenders, busers, bellhops, counter personnel, food servers, banquet captains -- the list is long. More formally, the Department of Labor defines a tipped employee as anyone who, on a regular basis, earns more than $30 a month in tips.
How much does your server really earn?
It depends. According to federal laws, the minimum hourly wage is the lowest salary that employers can legally pay their employees. So all of them make at least $8.44, which is the minimum hourly wage in New Jersey.
However, since your waiter/waitress is a tipped employee, calculating the total amount they earn can get a little tricky because their base pay is something called a minimum tipped wage, and it is not equal to the minimum hourly wage.
How is minimum tipped wage different from minimum hourly wage?
Tipped wage is the base wage that is paid to an employee who receives part of their salary from tips. Minimum hourly wage is the lowest salary that employers can legally pay their employees. Not all employees are tipped employees, hence the distinction.
An employer of a tipped employee is required to pay $2.13 per hour in direct wages if the tip amount added to the direct wages equals or exceeds the minimum hourly wage. If the total does not amount to the minimum hourly wage, the employer is responsible for making up the difference.
However, the state allows employers to take a tip credit. This means that though the employer will not technically take away the employee’s tips, they get to count some tips as if the employer had paid them directly to the employee, in order to reach the minimum hourly wage.
So employers can really pay their employees only $2.13 and have their employees’ earnings in tips make up the remaining amount that’s needed to reach the minimum hourly wage, instead of letting them keep the total tip amount.
What is the minimum tipped wage and minimum hourly wage in New Jersey?
In N.J., the minimum tip wage is $2.31 and the minimum hourly wage is $8.60.
The maximum tip credit that can be taken against minimum wage of $8.60 is $6.29.
Here’s a scenario to explain it: Jane Doe is a waitress at her neighborhood tacqueria. As per law, she earns the minimum hourly wage of $8.60. One evening, she receives $7.00 in tips in one hour. For that hour, Jane’s employer can choose to pay her only $2.31 in cash wages and credit $6.31 from the received tips against her minimum hourly wage of $8.60.
So the total she earns is $ 7.00 + $ 2.13 = $ 9.13.
If her employer paid her the minimum wage in full and did not count the tips towards making that amount, she would have earned $8.60 + $7.00 = $15.60.
In the next hour, Jane does not receive any tips. The employer then has to pay her the minimum wage of $8.60, as required by law.
Seven states, and the territory of Guam, have the same minimum wage for both tipped and non-tipped employees. The other 42 states, including ones without state minimum wage laws, have a lower minimum wage for tipped employees.
How important is your tip to their paycheck?
Since the IRS only asks for taxable income, rather than splitting between tips and wages, it is difficult to figure out exactly how much employees earn from tips. Tips are also underreported and one reason might be that much of it comes as cash.
However, we looked at data from two years’ of surveys by Payscale that calculated percentage of wage from tips at the national level, among other things. Waiters and waitresses reported 62 percent, while bartenders reported 59 percent.
How do tipped employees fare in N.J. versus everywhere else?
To answer that, we need to consider that the value of a dollar differs from state to state, meaning the cost of living is different across different states. The Tax Foundation analyzed data from the Bureau of Economic Analysis to calculate the relative value of $100 in each state.
In New Jersey it’s $88.18. In other words, New Jersey is pretty expensive. But what if we adjusted values for cost of living?
We charted value of $100 in New Jersey against minimum tipping wage and saw the New Jersey made it to the bottom left corner, because the cost of living in New Jersey is high and the state has low minimum tipping wage.
How does it look when cost of living is compared to minimum hourly wage?
Charting value of $100 against minimum hourly wage revealed that New Jersey does marginally better, but is still way behind most of the other states. This improvement is because the minimum hourly wage is significantly higher than minimum tipping wage, but not enough to put it ahead of other states.
How does that affect workers?
One word: instability.
"If you can only bank on making $2.13 and the rest that you make is up to tips and you know you’re technically supposed to be paid $8.60, it’s still very volatile," said Brandon McKoy, director of government and public affairs, New Jersey Policy Perspective. "How can you possibly set a budget and set a schedule and figure out what you want to have on a week to week basis if you’re not entirely sure what you’re getting paid?"
How will this proposed rule affect workers in N.J.?
Put in simple terms, the proposed tipping rule would allow employers to keep the tips and decide how to use them, as long as their employees were getting paid the minimum wage.
"If the proposed rule from the Trump administration that allows owners to pool tips and does not actually require them to share those tips with other workers as the restaurant industry passes, there will be people who will make less money," said McKoy.
McKoy also pointed out that majority tipped workers were women and people of color, and tend to come from low income households.
"It’s a big problem not only for the economic security of those workers but a problem for our economy at large," he said.
Are there any efforts to increase minimum wage?
The minimum wage was increased by 16 cents on Jan.1, 2018. Gov. Phil Murphy, who had vowed during his campaign to increase minimum wage to $15, maintained his stance earlier in January. However, he is yet to offer any details on how or when it would happen. How that will affect tipped workers is also unclear.
1. Should I tip in cash or on a credit card?
According to McKoy, tipping in cash is a better idea so it goes directly to the worker. Tipping on a credit card means the employer is responsible for ensuring that the tip goes to the worker.
Sometimes employers are charged a small fee for each payment that is processed. The employer, then, can deduct that amount from the total tip amount before giving it to the worker.
2. Should I tip on the whole bill or cost minus tax?
It's a personal preference. "These workers are not making that much money to begin with so I do as much as I can to help," said McKoy.
3. How do I calculate a tip quick and easy?
- Move the decimal to the left, double the number.
Example: Your bill is $23.75. You move the decimal to the left to get $2.375 and round it up to $2.40. Double that to get the tip amount: $4.8.
- Double the number before moving the decimal.
Double the bill amount of $23.75 to get $47.5. Now move the decimal to the left to get your tip amount: $4.75.
Say your tax is $2.47. Round up the tax to the nearest dollar to get $2.5. Double it to get $5.