Please note: We are not a legal firm and do not provide legal advice. This article is for informational purposes only. Please consult with a qualified attorney before implementing any practices discussed here.
Illinois boasts well over 25,000 restaurants, which account for around 10% of employment across the state. Treating restaurant employees fairly is critical to boosting a restaurant's reputation and attracting the right team members. One aspect of this is tipping.
The legalities of tipping in Illinois and how it impacts tipped employees differ from many other states. Understanding the law helps restaurant owners remain compliant and legal while maintaining good relationships with staff members.
Brendan McCarthy from Ballyhoo Hospitality shares how his team is preparing for Illinois minimum wage increases. Learn how they tested different business models to find what resonated with both customers and employees. From preferring increased line items over service charges to fostering team support, Brendan reveals actionable strategies that helped Ballyhoo succeed in Chicago.
A tip credit allows an employer to use an employee's collected tips to make up part of their wage. They have to pay a base wage, often called a minimum cash wage. Where minimum wage (currently $7.25 per hour) is in force, the base cash pay per hour works out to $2.13. If the employee receives enough tips during their shift, the employer can decide that $5.12 an hour of the worker's wage comes from those tips.
However, in Illinois, the minimum wage is higher than the national federal minimum. Illinois employees enjoy a rate of $15.00 an hour as of 2026. Illinois state law dictates that restaurant managers can take a tip credit, but only for 40% of the minimum wage. So, currently, the base Illinois wage is $9.00, and restaurant owners can use a tip credit of $6.00 an hour to make an employee's wage reach the minimum. In the city of Chicago, employers with 4+ employees must pay $16.60 an hour minimum, with tipped workers' minimum wage at $12.62 an hour. July 1, 2026, Chicago enters the next phase of its 'One Fair Wage' ordinance. The maximum tip credit is reduced to 16%, meaning the tipped cash wage rises to $13.94 (based on the $16.60 minimum)
If an employee doesn't receive enough tips to cover $6.00 an hour, the restaurateur must pay the difference. It's the restaurant's responsibility to ensure each team member is paid at least the state's minimum wage. Also, accurate records of all tips must be kept, and employees must be made aware that their wages will be partially paid via tips.
Chicago is on a fast track to eliminate the tip credit entirely by July 1, 2028.
While the OBBBA allows a federal deduction of $25,000 for tips, Illinois passed S.B. 1911 in early 2026 to "decouple" from several federal provisions. The federal One Big Beautiful Bill Act (OBBBA) creates a significant tax break for tipped workers, but Illinois has taken a different path. Through Senate Bill 1911 (Public Act 104-0453), signed in late 2025, Illinois has "decoupled" from certain federal provisions to protect the state's tax revenue.
2026 Update: Under the federal OBBBA, tipped employees in Illinois can deduct up to $25,000 in qualified tips from their federal taxable income starting in 2026. However, it is critical to note that Illinois has decoupled from this provision via Public Act 104-0453 (S.B. 1911). This means that while employees will see federal tax relief, they are still required to pay the full 4.95% Illinois state income tax on all tip income. Employers must provide precise, separate reporting on W-2s to ensure employees can correctly claim the federal deduction while remaining compliant with state tax laws.
Illinois has implemented a law (Public Act 103-0986) that prohibits credit card companies from charging interchange fees on the tax and tip portions of a bill. The IFPA is a landmark law that prohibits banks and credit card networks from charging merchant "swipe fees" on the tax and tip portions of a transaction. While a federal court has issued an injunction preventing the law's enforcement against national banks (like Chase or Bank of America) for now, the law technically remains in effect for state-chartered banks. However, to avoid a "two-tier" payment system, the state has delayed the overall effective date.
Tip pooling is a common practice in Illinois restaurants. Employees give a portion of their tips, which are then fairly distributed among other tipped employees. This can ensure hosts, bartenders, and other front-of-the-house workers get a reasonable cut of the tips.
Illinois restaurant owners should ensure they follow tip pooling laws:
Tip sharing in Illinois is another way employees split tips to try to ensure fairness. Tip sharing is less formal and not always managed by the restaurant leadership team. However, it's good practice to keep a record of shared tips to prevent conflict and discrepancies.
Tipping software allows Illinois restaurant owners to keep accurate records of both tip pooling and tip sharing schemes. It's also easier to make digital payouts, which are often more convenient for employees.
What is a service charge, and what is a tip? There's a common misconception that they're the same. However, a tip is a gratuity given voluntarily by a diner. A service charge is a mandatory charge added by the restaurant for services above and beyond the usual standard.
Mandatory service charges may be added for handling large parties, special events, or ordering off-the-menu items for catering jobs. It's best practice to note on a check that this service charge is going to the restaurant, not the server. Servers and other employees have no rights to these service charges because they are not tips. Making receipts clear and accurate helps everyone stay informed and improves the chances of your employees receiving tips. TipHaus integrates with all major POS systems, making service charge management and reporting seamless.
The legal landscape for credit card fees has shifted with the Illinois Interchange Fee Prohibition Act (IFPA). Effective July 1, 2026, financial institutions and card networks are prohibited from charging interchange fees on the portion of a transaction attributable to sales tax and gratuity. Because employers are no longer being charged fees on the tip amount, they should no longer deduct processing fees from employee tips. While currently facing legal challenges from national banks, the law sets a new standard for tip protection in Illinois.
There are so many ways to protect tipped workers' rights while running a profitable business. Stay up-to-date with law changes and increasing minimum wages, and understand how much you can claim as a tip credit. Ensure tip pools are fair and distributed in a timely manner, and never deduct an employee's tips for breakages or other restaurant costs.
Tip compliance laws vary by state and even by city, making manual processes a risky approach. TipHaus takes the guesswork out of compliance by providing automated solutions tailored to local regulations. Whether it's tip pooling, reporting, or ensuring fair wages, our platform keeps your operations compliant, consistent, and stress-free.
Illinois laws regarding tip credits may change in the near future, so it's more vital than ever to understand how this could impact your business and your team. You can find out more about tipping in Illinois at the U.S. Department of Labor (DOL) site.
Handling tips is easier with the right tipping software, so start your free trial of TipHaus today and discover how to make tipping better for your whole workforce.
