When a customer adds a tip to a card payment, the business pays the processor a fee on the tip as well as on the bill. Some restaurants, bars and salons pass that cost on to the server, bartender or stylist by paying out slightly less than the tip on the slip. Whether that is allowed depends on where the business is. Federal law permits it within tight limits; a handful of states forbid it outright.
This article sets out what the rules say and where they apply, as of October 2026, with the primary source for each. It is not legal advice, and a business considering the practice should check its own state's current law and, if in doubt, ask its state labor department or a lawyer.
Why there is a fee on the tip at all
Processors charge on the whole amount they capture, and a tip added on the terminal or written on a slip becomes part of that amount. Square's fee guide puts it plainly: processing fees are taken out of the total amount of each transaction, 'including tax and tip'. In a full-service restaurant the card is often authorized for the bill and then adjusted upward when the tip is entered; the fee is charged on the final, adjusted amount. Our guide to authorization holds covers how long a card authorization stays open at each processor before it has to be captured.
What the federal rule allows
Under the Fair Labor Standards Act, tips belong to the employee, and an employer may not keep any part of them, whether or not it takes a tip credit. The Department of Labor's Wage and Hour Division treats the card fee as a narrow exception. Section 30d13 of its Field Operations Handbook, last revised on 3 March 2023, and Fact Sheet #15 say an employer may reduce a card tip by the percentage the credit card company charges it. The Division's own example: if the card company charges 3% on all sales, the employer may pay the employee 97% of the tip.
The limits are as important as the permission:
- Actual cost only. The deduction cannot exceed the transaction fee the card company actually charges. Taking more is a 'keeping' violation, whether or not the employer takes a tip credit. The handbook also says an employer may not deduct an average or standard amount that exceeds what the card companies charged.
- The processing fee, nothing else. The handbook names costs that may not be recovered from tips: the 'time value' of waiting for card money, the card terminal, and dedicated phone lines.
- Paid on time. Card tips are due on the employee's regular payday, and Fact Sheet #15 adds that they 'may not be held while the employer is awaiting reimbursement from the credit card company'.
- Minimum wage still met. The deduction may not take the employee below the required minimum wage, including any tip credit claimed. Federally, a tip-credit employer pays as little as $2.13 an hour in cash and counts up to $5.12 of tips towards the $7.25 minimum.
- Uncollectable charges. If a card charge is never collected, through no failure of the employer, the employer need not pay that tip, and may recover one already paid, but where the tip went into a pool, each employee answers only for the share of it they received back, and a recovery may not cut the tips an employee keeps below the tip credit claimed for that week.
Federal law sets the floor. Fact Sheet #15 notes that where state law is more protective, the employer must follow the state, and that some states 'do not allow the employer to deduct credit card fees from employees' tips'.
States that forbid the deduction
We checked each state commonly cited online against its statute, regulation or labor-department publication. These six bar the practice in their own words:
- California. Labor Code section 351 requires an employer that accepts card tips to pay 'the full amount of the gratuity that the patron indicated on the credit card slip, without any deductions for any credit card payment processing fees', no later than the next regular payday.
- Colorado. The state labor department's interpretive notice on tips (INFO #3C) says employers may not use tips 'to pay credit card processing fees or similar costs'. Under the state's wage order, 7 CCR 1103-1, rule 1.10(B), deducting them nullifies the employer's tip credit; the notice adds that the employer must then pay full minimum wage and return any shared tips.
- Delaware. The Department of Labor announced on 31 January 2025, after an investigation and legal review, that withholding card fees from tips is illegal under 19 Del. C. section 902(d), which makes a gratuity the sole property of the employee. Its Q&A says the rule applies to every employer in the state and urges employers to repay past deductions.
- Maine. Title 26, section 664 says the employer 'may not deduct any amount from employee tips charged to a credit card, including, but not limited to, service fees', and must pay card tips by the next regular payday.
- Minnesota. Since 1 August 2024, Minnesota Statutes section 177.24 requires 'the full amount of gratuity' paid by card or electronic payment to be distributed by the next scheduled pay period. The Department of Labor and Industry describes this as 'without deductions for swipe fees'.
- New Jersey. N.J.A.C. 12:56-3.5(g), in force since August 2020, bars an employer from using tips to pay 'any portion, however small' of the card fee, whether or not it takes a tip credit. When the state adopted the rule it called the fee 'a cost of doing business, like rent or utilities'.
Massachusetts is close to this group but less explicit. Its tips law forbids an employer to demand or accept 'any payment or deduction from a tip', and the Attorney General's advisory says the law 'eliminates any distinction between cash and credit card tips'. Neither text mentions processing fees by name.
States that allow a proportional deduction
Several states spell out the federal approach and pin it to the tip's share of the bill:
- Illinois. The Wage Payment and Collection Act lets an employer withhold 'a proportionate amount' of card fees from card tips, capped at the tip's proportion of the overall bill, and requires tips to be paid within 13 days after the end of the pay period.
- New York. The hospitality wage order, 12 NYCRR 146-2.20, lets the employer subtract the tip's pro-rated share of the card company's charge. Its example: a $20 tip on a $100 bill at a 5% fee leaves the employee $19.
- Washington. The Department of Labor and Industries allows a prorated deduction and gives a $20 tip on an $80 order as an example of what is not allowed: taking the whole $1 fixed transaction fee from the tip. A bill to ban the deduction, HB 1623, introduced in 2025 and carried into the 2026 session, stayed in the House Rules Committee and had not passed as of October 2026.
- District of Columbia. A business paying the lower tipped wage must include in its wage notice to staff 'the percentage by which tips paid via credit card will be reduced by credit card fees', so the deduction is contemplated rather than banned.
We could not find a specific rule on card fees in Oregon's statutes or its labor bureau's guidance, despite claims online that Oregon regulates the deduction, so it is not listed here. A state's absence from these lists does not mean the deduction is allowed there; general wage-deduction laws still apply.
What the fee on a $20 tip actually is
Take a $20 tip on an $80 card bill, so the processor charges on $100 and the tip is one fifth of it. These are the published in-person rates, from each provider's own pricing page on 6 October 2026. The first figure is the percentage applied to the tip, which is what the federal guidance describes; the figure in brackets also gives the tip one fifth of the fixed per-transaction fee, which is how Illinois and Washington describe the cap.
- Square: 2.6% + 15 cents on Square Free, 2.5% + 15 cents on Plus ($49 a month per location) and 2.4% + 15 cents on Premium ($149). The tip's share is 52, 50 or 48 cents (55, 53 or 51 cents).
- Clover: 2.3% + 10 cents on its restaurant plans and on the Standard and Advanced personal-services plans, 46 cents (48 cents); 2.6% + 10 cents on the Basic personal-services plan, 52 cents (54 cents).
- SpotOn: 2.45% + 15 cents on POS Essentials, 49 cents (52 cents); 2.79% + 20 cents on the All-In plan, 56 cents (60 cents). American Express costs more on Essentials, at 3.19% + 15 cents.
- Vagaro: 2.6% + 10 cents for businesses under $4,000 a month, 52 cents (54 cents); 2.29% + 19 cents above that, for $10 a month, 46 cents (50 cents).
- GlossGenius: a flat 2.6% with no fixed fee, 52 cents either way.
- Fresha: 2.29% + 20 cents in person, 46 cents (50 cents).
So the fee on a $20 card tip runs from about 46 to 60 cents at these providers. Toast's pricing page describes its processing as a 'simple, flat rate' without giving the number, TouchBistro, Lightspeed Restaurant, Zenoti and Mindbody publish no card rate on their pricing pages, and Boulevard gives only a starting rate of 2.65%, so a business on any of them has to take the figure from its own statement. Rates on the interchange-plus pricing many larger merchants use vary card by card, which is why the federal handbook's warning against deducting a composite that exceeds the actual charge matters.
Small per tip, the amounts add up for the employee. A bartender taking $400 a week in card tips at 2.6% would lose $10.40 a week, or about $540 over a year. Our salon and spa fees comparison and restaurant processor guide cover what these providers charge on the rest of the bill.
Tip pools and tip-outs
A deduction made before tips are pooled reduces every share of the pool, so the same limits apply: no more than the actual fee, and the pool paid out in full. Federal rules require an employer that collects and redistributes tips to pay them out no later than the regular payday for the workweek, and an employer, manager or supervisor may never take a share. Some point-of-sale systems split card tips automatically; Square for Restaurants, for example, lists a tip-pooling feature that divides each card tip equally among tip-eligible staff clocked in at the time. A business in one of the six states above should check that any such tool pays out the full tip.
Illinois' Interchange Fee Prohibition Act is a different matter. It concerns the interchange that card issuers charge on the tax and tip portions of a sale, not what an employer pays staff, and it has not taken effect. Our article on the Illinois interchange law covers its delays and the federal court injunction that blocks most of it.
What to do
- Check your state first. In California, Colorado, Delaware, Maine, Minnesota and New Jersey the answer is no, and Massachusetts' tips law forbids any deduction from a tip. Elsewhere, look for a state rule before relying on the federal one.
- If you deduct, deduct the actual fee and no more. Take the rate from your processor statement; federal guidance allows a blended or average figure only if it does not exceed what the card companies actually charged.
- Do not recover the card terminal, phone lines or the cost of waiting for settlement from tips. Federal guidance names these as costs that stay with the business, and its list is not exhaustive.
- Pay card tips on the next regular payday, whether or not the processor has paid you yet.
- Write the policy down and tell staff in advance. A business taking a federal tip credit must already give tipped staff notice, and in the District of Columbia an employer paying the tipped wage must state in its notice the percentage taken for card fees.
- Keep the records: statements showing the rate charged, the card tips each employee received, what was deducted, and when it was paid. Colorado's labor department says tip records must be kept on a daily or weekly basis.
- Run the numbers before deciding. At about 50 cents per $20 tip, the deduction saves a business little, and in at least six states it is barred.
For step two, our walkthrough of how to read a merchant processing statement shows where the effective rate and per-transaction fees appear.
