Getting tip credit wrong in South Dakota doesn’t just mean unhappy employees—it means back pay, penalties, and potential Department of Labor investigations. And with the state’s minimum wage adjusting every January, the numbers you used last year are already outdated.
This guide covers everything from calculating tip credit to setting up compliant tip pools, so you can pay your team correctly and keep your restaurant out of trouble.
What is the minimum wage for tipped employees in South Dakota?
South Dakota allows restaurants to pay tipped employees a cash wage of 50% of the state minimum wage, as long as tips bring total compensation up to the full minimum wage. The state adjusts its minimum wage each January based on the Consumer Price Index, so both the regular and tipped rates change annually.
As of 2026, the non-tipped minimum wage is $11.85 per hour. So, the minimum wage is $5.925 per hour. To keep up with current rates, check the South Dakota Department of Labor and Regulation.
A “tipped employee” under South Dakota law is someone who customarily receives more than $35 per month in tips. Servers, bartenders, and hosts typically fall into this category.
Current tipped minimum wage rate
South Dakota sets the tipped minimum wage at exactly half of the state minimum wage (currently $5.925). When the state minimum goes up, the tipped rate follows automatically.
This differs from federal law, which sets a flat $2.13 per hour tipped minimum regardless of the regular minimum wage. South Dakota’s approach means your tipped employees’ base pay rises with inflation each year.
How the annual minimum wage increase works
Every January 1, South Dakota recalculates the minimum wage based on cost-of-living changes from the previous year. No legislative action is required for the adjustment to take effect.
For restaurant operators, this means reviewing payroll settings each December. The change affects both tipped and non-tipped employees at the same time.
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How tip credit works in South Dakota
Tip credit is the difference between what you pay a tipped employee in cash wages and the full state minimum wage. In South Dakota, you can claim a tip credit of up to 50% of the minimum wage, which lets your employees’ tips count toward half of their minimum wage obligation.
The catch: this only works if the employee’s tips actually cover that gap. If they don’t, you’re on the hook for the difference.
Calculating tip credit step by step
The math is straightforward once you understand the pieces:
- Cash wage: The hourly rate you pay directly to the tipped employee
- Tip credit: The portion of tips applied toward meeting minimum wage (up to 50% of minimum wage in South Dakota)
- Total compensation: Cash wage plus tips, which can’t fall below the full state minimum wage
For example, if the minimum wage is $11.85, you can pay a cash wage of $5.93 (half) and claim up to $5.92 in tip credit. But your employee’s total earnings still have to hit that $11.85 floor.
What to do when tips fall short of minimum wage
When an employee’s tips plus cash wage don’t reach minimum wage, you pay the difference. This is called “make-up pay.”
Track this by pay period. If your server worked 30 hours and earned $150 in tips on top of their $5.93 cash wage, their total hourly rate comes to $10.93, which is below the $11.85 minimum. You’d owe them the difference for each hour worked.
South Dakota tip laws vs federal tipped minimum wage requirements
South Dakota and federal law both allow tip credits, but they work differently.
| Requirement | South Dakota | Federal (FLSA) |
|---|---|---|
| Tip credit allowed | Yes | Yes |
| Tip credit calculation | 50% of state minimum wage | Fixed dollar amount |
| Make-up pay required | Yes | Yes |
| Minimum wage basis | Adjusts annually with CPI | Set by Congress |
When state and federal rules conflict, you follow whichever benefits the employee more. In South Dakota, that’s usually the state law since the tipped minimum wage tends to be higher than the federal $2.13.
Who owns tips in South Dakota?
Tips belong to the employee. Under both federal and South Dakota law, employers cannot keep any portion of tips that employees receive, whether the tip comes in cash, on a credit card, or through a digital payment.
Managers and supervisors face the same restriction. If someone has hiring or firing authority or directs other employees’ work, they can’t participate in tip pools or take tips from staff, even if they occasionally help serve tables.
What are the tip pooling rules in South Dakota
Tip pooling is legal in South Dakota, but the rules depend on whether you’re taking a tip credit. A tip pool collects tips from multiple employees and redistributes them according to a set formula.
Employees who can participate in tip pools
When you take a tip credit, only employees who customarily receive tips can be in the pool:
The key question: Does this person regularly interact with customers in a way that generates tips?
Employees who cannot participate in tip pools
When you’re claiming a tip credit, the following employees are excluded:
- Owners
- Managers with supervisory authority
- Back-of-house staff (cooks, dishwashers, prep cooks)
However, if you pay the full minimum wage without taking a tip credit, federal law allows you to include back-of-house employees in the pool. This only applies when no tip credit is claimed on anyone in the pool.
What is the difference between tips and service charges
Tips and service charges look similar on a guest check, but they’re treated completely differently under the law.
- Tips: Voluntary amounts left by customers at their discretion. Tips belong to the employee and can count toward tip credit.
- Service charges: Mandatory amounts added by the restaurant (like auto-gratuity on large parties). Service charges belong to the employer by default.
If you add an automatic 18% gratuity for parties of eight or more, that’s a service charge, not a tip. You can distribute it to employees, but you’re not required to. Whatever you decide, put it in writing and apply it consistently.
Can employers deduct credit card fees from tips in South Dakota
Federal law allows employers to deduct a proportionate share of credit card processing fees from tips paid by card. If your processor charges 3%, you can deduct 3% from the tip portion of that transaction.
Two limits apply: the deduction can’t reduce the employee’s wage below minimum wage, and you can only deduct the actual processing percentage, not a flat fee or rounded-up amount.
How tips affect overtime pay calculations in South Dakota
For tipped employees, overtime is calculated based on the regular rate—not actual tip earnings. Federal overtime rules require 1.5× pay after 40 hours per week, and that multiplier applies to the employee’s “regular rate,” which typically equals the full minimum wage when a tip credit is taken.
If your server earns a $5.925 cash wage plus a $5.925 tip credit, their regular rate is $11.85 (the state minimum wage). Overtime pay would be $17.78 per hour (1.5 × $11.85). After subtracting the allowable tip credit ($5.925), you pay $11.85 in direct wages for each overtime hour.
The key difference: You don’t include the employee’s actual tip earnings in the calculation. Even if your server averages $15 per hour in tips, overtime is still based on the $11.85 minimum wage. Under federal law, only the tip credit amount counts toward the regular rate—tips beyond that are excluded from overtime calculations.
What are the record-keeping requirements for tips in South Dakota?
Accurate records protect both you and your employees. Documentation to maintain includes:
- Employee tip reports (daily or per pay period)
- Total tips received by each employee
- Tip credit amounts claimed
- Tip pool distributions and formulas
- Any make-up pay provided
Federal law requires retaining tip records for at least three years.
Are there local tip laws in South Dakota cities?
South Dakota doesn’t currently have cities with separate tip or minimum wage ordinances. State law applies uniformly across Sioux Falls, Rapid City, and everywhere in between.
Local regulations can change, though. If you’re expanding to new locations, a quick check with the city clerk’s office takes five minutes.
What are the penalties for violating South Dakota tip laws?
Tip law violations carry real consequences: back pay owed to affected employees, liquidated damages (often equal to the back pay amount), legal fees if employees pursue private action, and Department of Labor investigations.
Employees can file complaints with the South Dakota Department of Labor or pursue claims under federal law through the U.S. Department of Labor.
How to stay compliant with South Dakota tip laws
Compliance isn’t complicated, but it does require consistent attention.
Use written tip policies
Document your tip pool structure, credit card fee policy, service charge distribution, and how you handle make-up pay. Share this with every tipped employee during onboarding and keep a signed acknowledgment in their file. Download a sample tip pool policy here.
Track tips digitally
Manual tip tracking creates errors and compliance gaps. Moving to digital tracking gives you automatic records, easier calculations, and a clear audit trail. Tip management tools can calculate tip credit automatically and flag when make-up pay is needed. Platforms like 7shifts include tip pooling and distribution features built for restaurants.
Audit tip credit calculations regularly
Don’t wait for payroll to catch shortfalls. Review tip credit calculations each pay period to confirm that every employee hit minimum wage. Build this into your closing routine: before you approve timesheets, run a quick check on your tipped employees’ total compensation.
Make tip management easier for your restaurant
Tracking tips, calculating tip credit, and staying compliant takes time. Between scheduling, inventory, and running service, payroll compliance often gets pushed to the last minute.
Restaurant scheduling and payroll tools can automate the heavy lifting, from calculating tip pools to flagging make-up pay requirements to keeping records organized.
Ready to simplify tip management? Start a free trial with 7shifts and see how automated tip tracking can save you time while keeping you compliant.
Payroll Implementation Checklist
Use this handy checklist so you don’t miss a thing.
FAQs about South Dakota restaurant tip laws
Can back-of-house employees participate in tip pools in South Dakota?
Back-of-house employees like cooks and dishwashers can only join tip pools if you pay the full minimum wage to everyone in the pool, meaning you don’t take a tip credit on any participating employee.
How long do South Dakota restaurants need to keep tip records?
Keep tip records for at least three years to comply with federal FLSA requirements. This includes daily tip reports, tip pool distributions, and any make-up pay calculations.
Do tipped employees in South Dakota receive the full minimum wage during training?
Training shifts follow the same tip credit rules as regular shifts. If the trainee receives tips during training, you can pay the tipped minimum wage, provided tips make up the difference.
Can restaurant managers or owners keep any portion of employee tips in South Dakota?
Generally, no. Federal law prohibits restaurant managers and owners from keeping any portion of employee tips or participating in tip pools. This applies even if the restaurant pays full minimum wage and does not take a tip credit.
The one exception: Managers or owners may keep tips they receive directly from customers for service they personally and solely provide—for example, if they personally serve a table or act as the only bartender on duty. They may not take tips earned by other employees or from shared tip pools.
Rebecca Hebert, Sales Development Representative
Rebecca Hebert
Sales Development Representative
Rebecca Hebert is a former restaurant industry professional with nearly 20 years of hands-on experience leading teams in fast-paced hospitality environments. Rebecca brings that firsthand knowledge to the tech side of the industry, helping restaurants streamline their operations with purpose-built workforce management solutions. As an active contributor to expansion efforts, she’s passionate about empowering restaurateurs with tools that genuinely support their day-to-day operations.
