Cashing In: How the New Jersey Minimum Wage Increase Will Affect Tipped Employees

Cashing In: How the New Jersey Minimum Wage Increase Will Affect Tipped Employees

by Stacy Gilbert, CPA

ABSTRACT: The minimum wage is a cornerstone of the United States' labor system and has been a front-line labor law topic among employers and employees alike for decades. Within the restaurant industry, New Jersey labor law allows tipped employees to be paid a lower cash wage than the standard New Jersey minimum wage by their employers, as long as their total wages with the cash wages from tips meet the state minimum wage requirement. For tax purposes, tips earned per hour can be deducted from a tipped employees wage as a "tip credit". On Monday, February 4, 2019, New Jersey enacted a new law that will systematically raise the minimum wage over five years. Under the new law, tip credits that employers are permitted to take against the base minimum wage will also increase, impacting the resulting cash wages.

The minimum wage is a cornerstone of the United States' labor system. It was first introduced in the 1930s, during the great depression, and has been a front-line labor law topic among employers and employees alike for decades.

Within certain industries, like the restaurant industry, New Jersey labor law allows tipped employees to be paid a lower cash wage than the standard New Jersey minimum wage by their employers. In other words, since the minimum hourly wage in New Jersey is presently $8.85, up to $6.72 in tips earned per hour can be deducted from their wage as a "Tip Credit."

New Jersey is among several states that require employers to pay tipped employees a minimum cash wage above the minimum cash wage of $2.13, as required under the federal Fair Labor Standards Act. In other words, with the maximum tip credit taken against minimum wage, tipped employees must be paid a cash wage of at least $2.13 per hour, for a total minimum compensation of $8.85 per hour (including tips).

On Monday, February 4, 2019, New Jersey enacted a new law that will systematically raise the minimum wage over five years, culminating in a $15/hour minimum wage on January 1, 2024 for most employees*. Under the new law, tip credits that employers are permitted to take against the base minimum wage will also increase, impacting the resulting cash wages.

Tipped Minimum Wage Table:

The following table represents the phase in schedule of the minimum wage and the corresponding tip credit and cash wage increases.

Tipped Employees and Overtime Pay

Most tipped employees in New Jersey qualify for overtime pay when they work over a certain number of hours in a week. Overtime hours legally pay 1.5 times the employee's normal hourly wage. If a tipped employee earns overtime hours, their overtime rate is calculated based on the full minimum wage, not the lower cash wage being paid by the employer. The employer is not allowed to take a higher tip credit for overtime hours than regular work hours.

Tip Reporting

To the IRS, tips are taxable income just like wages and are subject to both Federal and New Jersey taxation – employees are legally required to report their tips to their employer each month.

Restaurant owners and other New Jersey employers should make sure that your payroll personnel or payroll service provider takes the appropriate actions to implement the minimum wage increases when they become effective.