Michigan Tip Laws: Key Regulations Employers Must Know

Key Takeaways

• Tips belong to employees—employers cannot use them for business expenses.
• Michigan allows a tip credit, but employees must still earn at least the state’s minimum wage.
• Tip pooling is allowed, but only among eligible employees—managers and supervisors cannot take a share.
• Employers must track and report all tips for tax compliance under both Michigan and federal law.
• Digital tipping solutions like eTip help ensure accurate, transparent tip distribution while simplifying compliance with Michigan tip laws.

Tipping is an essential part of the hospitality industry, serving as both a motivator for employees and a way for guests to show appreciation for great service. However, navigating Michigan’s tip laws can be complex for restaurant and hotel managers, with regulations covering everything from minimum wage requirements to tip pooling rules and tax reporting obligations.

Michigan, like many states, allows for a tip credit system, but employers must make sure that tipped employees still meet minimum wage thresholds. Additionally, compliance failures—whether through misclassified service charges, improper tip distribution, or inaccurate tax reporting—can lead to legal disputes, IRS penalties, and even lawsuits.

For hospitality managers, understanding Michigan tip laws is key to staying compliant, avoiding financial risks, and maintaining a fair and rewarding workplace for employees. 

In this article, we’ll break down Michigan’s key tipping regulations, discuss common compliance challenges, and explore how digital tipping solutions like eTip can help streamline tip management while ensuring full compliance with state and federal laws.

Who Keeps the Tips?

Under Michigan labor laws, tips belong to the employees who earn them. Employers aren’t allowed to take or withhold tips to cover business expenses like credit card processing fees, damaged equipment, or other operational costs.

Both the Fair Labor Standards Act (FLSA) and Michigan state law make it clear: tips are the property of the workers who receive them. If an employer deducts or withholds tips unfairly, they could face serious penalties from state and federal labor regulators.

Michigan Tip Laws: Tip Credit & Minimum Wage 

Michigan allows employers to use a tip credit, which means they can pay tipped workers a lower hourly rate as long as their tips make up the difference to meet the state’s minimum wage.

As of March 2025, Michigan’s minimum wage rates are:

• Standard minimum wage: $12.48 per hour
• Tipped minimum wage: $5.99 per hour (provided tips bring total earnings up to at least $12.48 per hour)

If a worker’s wages (including tips) don’t reach the state’s minimum, the employer is legally required to cover the shortfall. Businesses must also maintain accurate records to prove tipped employees are earning at least the minimum wage.

In February, a Michigan Tip law change brought the minimum up to $12.48, and this is part of a scheduled plan to bring the Michigan minimum wage up to $15.00 per hour by 2027. 

In addition, there is a plan in place to gradually increase the tipped minimum wage each year, with the aim of reaching 50% of the standard minimum wage by 2031. ​

It is the employer’s responsibility to make sure that tipped employees’ combined base wage and tips meet or exceed the standard minimum wage. ​

Tip Pooling & Tip Sharing in Michigan

Michigan law permits tip pooling, meaning employees may be required to share tips with coworkers. However, there are strict rules about how this works:

• Only front-of-house and service staff can be included in a tip pool.
• Managers and supervisors are not allowed to take a share of employee tips.
• Tip pools must be fair and transparent, with clear guidelines on how the tips are distributed.

Employers must inform workers in advance if a tip pooling policy is in place. If a tip pool is handled unfairly or in violation of labor laws, businesses could face legal challenges and penalties.

Service Charges vs. Tips: What’s the Difference?

Many Michigan restaurants and hospitality businesses include service charges on customer bills, but these are not the same as tips.

• Tips – Voluntary payments left by customers that belong entirely to employees.
• Service Charges – Mandatory fees added to a bill, which belong to the business unless the employer chooses to distribute them to staff.

If a service charge is meant to function as a tip, it must be clearly disclosed to customers to prevent any misunderstandings.

Reporting and Tax Obligations for Michigan Employers

Both Michigan labor laws and IRS regulations require that all tip income is properly reported and taxed.

Employer responsibilities include: 

• Maintaining accurate records – Employers must track all reported tips, whether they come from cash, credit cards, or digital payments.
• Withholding applicable taxes – Social Security, Medicare, and both federal and state income taxes apply to tip earnings.
• Filing IRS Form 8027 (if required) – Restaurants with 10 or more employees must submit this form annually, summarizing total tip earnings.

Failing to comply with tax regulations can lead to a range of negative consequences, such as increased IRS scrutiny, financial penalties, and back taxes.

Common Challenges in Michigan Tip Law Compliance

Navigating Michigan’s tipping laws can be complex, and many businesses face challenges when it comes to compliance. From accurately tracking tips to ensuring fair distribution among employees, employers must take proactive steps to avoid legal and financial pitfalls. 

Here are some of the most common issues and how to address them effectively.

Ensuring Tip Tracking Accuracy

One major challenge is ensuring accurate tip tracking. Relying on manual records can lead to errors, miscalculations, and incomplete documentation, which not only puts businesses at risk of IRS compliance issues but can also create disputes among employees. 

A practical solution is to implement a digital tipping system that automates tracking, minimizes human error, and ensures all reported tips are properly recorded.

Avoiding Employee Disputes Over Tip Distribution

Another frequent issue is employee disputes over tip distribution. When tip-sharing policies are unclear or inconsistently enforced, workers may feel unfairly compensated, leading to frustration and tension in the workplace. 

The best way to prevent these conflicts is to adopt real-time tip tracking, which allows employees to see exactly how tips are allocated. Transparency in distribution reassures staff that they are receiving their fair share and helps foster a more positive work environment.

Managing Credit Card and Digital Tips

Lastly, businesses must be mindful of handling credit card and digital tips correctly. Michigan law explicitly prohibits employers from deducting credit card processing fees from employees’ tip earnings, but mistakes in processing these transactions can still occur. 

To ensure compliance, businesses should automate credit card tip payouts, streamlining the process and avoiding payroll complications that could otherwise result in legal trouble.

How eTip Helps Michigan Restaurants and Hotels Stay Compliant With Michigan Tipping Laws

For Michigan hospitality businesses, a digital tipping platform like eTip offers a range of benefits, such as reducing compliance risks, simplifying payroll, and preventing disputes over tip distribution.

Key benefits of eTip for employers include:

• Real-time tracking for error-free tip records.
• Automated tip pooling that aligns with Michigan labor laws.
• Instant tip payouts to employees, eliminating payroll delays.
• Digital compliance logs to help prevent IRS penalties.

As labor laws continue to evolve, digital tipping solutions are becoming the industry standard for managing tips in a fair, efficient, and legally compliant way.

The Future of Tipping Compliance in Michigan’s Hospitality Industry

What’s next for businesses that rely on tipping? Employers should be proactive in adapting to potential changes in labor laws and increasing IRS oversight of tipping practices.

Industry trends indicate that digital tip tracking is likely to become the norm in Michigan’s hospitality sector. On the whole, government enforcement of tipping policies is increasing—meaning that accurate records will be more critical than ever, while employees are increasingly expecting more transparency. 

Michigan businesses that modernize their tipping practices will not only avoid compliance risks but also foster a better work environment—leading to happier staff and an improved guest experience. Adopting a reliable digital tipping platform like eTip is a surefire way to achieve these goals. 

FAQ’s About Michigan Tip laws