Definition
Tips are voluntary payments made by a customer to a service worker, given as a personal gift in appreciation of services rendered and separate from the base price charged for those services. The defining characteristic of a tip is its voluntary nature: the customer exercises personal discretion over whether to give it and in what amount. Tips are distinct from mandatory service charges, which are contractually required and typically treated differently under both employment and tax law.
In employment law, tips are compensation received by an employee directly from a third party (the customer) rather than from the employer. Their treatment intersects with minimum wage obligations, tip pooling arrangements, tip credits, and payroll reporting duties. In tax law, tips received by an employee are gross income and are subject to federal income tax, Social Security tax, and Medicare tax, regardless of whether the employer is involved in their collection or distribution.
Common Language
Modern common usage (Wiktionary): The Wiktionary entry for the verb form "tips" is the third-person singular simple present of "tip" — as in, "she tips generously." The noun form "tip" in ordinary English means a gratuity given to a service worker.
Historical common usage (Webster's 1913): Webster's 1913 defines "tip" in the gratuity sense as a small present of money given to an inferior, as to a servant or waiter, for some service rendered.
The gap between common and legal meaning here is narrow but consequential. Ordinary usage treats a tip as informal and unremarkable. Legal usage imposes a framework of obligations on both employers and employees around what appears to be a simple personal gesture — including mandatory reporting, tax withholding, and in some jurisdictions, regulated pooling and credit mechanisms. The informality implied by common usage does not survive contact with employment and tax law.
Recognized Forms
/SUBTYPES
Cash tips: Tips paid directly to the employee in currency by the customer. Must be reported by the employee to the employer and included in income.
Charged tips: Tips added to a credit or debit card transaction. The employer receives and then distributes these to employees; they appear in payroll records and are subject to standard withholding.
Tip pool distributions: Amounts an employee receives from a collective sharing arrangement among tipped employees. Treated as tips for income and tax purposes. The legality and permissible structure of tip pools is a regulated area under federal and state wage law.
Allocated tips: An IRS mechanism applied when an employee's reported tips fall below a threshold percentage of gross receipts. The employer allocates the shortfall on the employee's W-2, signaling a potential underreporting issue.
Why It Matters in Research
The central research trap with tips is treating them as a single legal category. Tips intersect at least two distinct bodies of law — employment/wage law and income tax law — and what is true in one domain is not necessarily true in the other. A mandatory service charge that is distributed to employees may be a wage for employment law purposes but analyzed differently for tax purposes than a voluntary tip.
Historical sources, including Bouvier's, treat tips primarily as private personal gifts with minimal legal significance. This framing is obsolete. Modern federal law — particularly through IRS reporting requirements and the Fair Labor Standards Act's tip credit provisions — has heavily regulated tips as a form of employee compensation. Researchers using pre-mid-20th-century sources will miss this regulatory overlay entirely.
Jurisdictional variation is substantial. Several states have eliminated the tip credit entirely, meaning employers cannot count tips toward satisfying minimum wage obligations. Tip pooling rules also vary. State-level research is essential before drawing conclusions from federal sources alone.
In the Law Mind corpus, tips appear across employment and tax materials but are treated differently in each. The employment encyclopedia addresses wage calculations, tip credits, and pooling. The tax encyclopedia addresses gross income inclusion, reporting thresholds, and allocated tips. A complete picture requires consulting both.
Historical Dictionary Support
Bouvier's Law Dictionary defines tips as "small donations given and intended as personal gifts, in addition to the regular charge for the services rendered," citing a Kentucky appellate decision (149 Ky. 377). This definition captures the voluntary, gift-like character of a tip and its separateness from the base service charge — points that remain accurate today as a starting description.
What Bouvier's does not address, because it predates the modern regulatory framework, is the transformation of tips from informal gifts into a compensatory category subject to federal wage law and mandatory tax reporting. The gift framing in Bouvier's remains useful for understanding why tips are treated differently from wages in some contexts (e.g., certain contractual and benefits calculations), but it should not be taken to mean that tips escape legal regulation.
No significant divergence among historical sources on the core definition; the term is narrowly defined and Bouvier's treatment is representative of the era.
Jurisdictional Note
Federal law establishes baseline rules for tip credits, pooling, and tax reporting, but states vary significantly. Several states (including California, Minnesota, and Alaska) prohibit employers from taking a tip credit against minimum wage obligations. State wage statutes should always be checked against the federal FLSA framework before advising on tip-related employment matters.
Encyclopedia Cross-Reference
Payroll Deductions, Tips, and Commissions — The Law Mind Employment & Labor Law Encyclopedia (employment_64)
Gross Income — Tips and Gratuities — The Law Mind Tax Encyclopedia (tax_109)