A tip credit is the amount of tips you earn that your employer can count towards its obligation to pay you the minimum wage.
An employer that is allowed to take a tip credit can pay you less than the regular minimum wage, as long as you earn enough in tips to bring your hourly compensation up to at least the minimum wage. Under federal law, for example, the minimum wage is $7.25 an hour, but employers may pay tipped employees as little as $2.13 an hour, as long as the employee earns at least the rest in tips. An employer taking advantage of this lower minimum wage is taking a tip credit of $5.12 an hour.
Not all states allow employers to take a tip credit. Some states that allow a tip credit set the minimum tipped wage amount at $2.13 an hour, like federal law; others have established a higher tipped minimum wage.