Sense with Cents

Washington state has two mandatory social insurance programs funded through payroll: Paid Family and Medical Leave (PFML), and WA Cares for long-term care. Both are funded by a percentage of wages. Both are supposed to help workers who get sick, have a baby, care for a dying parent, or eventually need help bathing and dressing in old age.

Both exclude reported tips from the wages they are calculated on.

Twelve other states and the District of Columbia currently have paid family and medical leave programs, with more on the way. Every one of them includes reported tips in the wage base. Washington stands alone.

Washington’s own unemployment insurance program includes reported tips too. Same paycheck, same worker. Tips count for unemployment, but not for family leave, and not for long-term care.

This is not an accident. It is traceable. And it hurts workers who arguably need these benefits more than non-tipped workers.

Why I am writing about this

A Medlin Payroll customer recently asked me how to get reported tips out of their WA Cares calculation. They needed clarification and confirmation of the proper settings — Medlin excludes tips from these two items by design, because the statute requires it. Answering their question reminded me to dig back into the statute to see why Washington’s wage definition is different from everywhere else. The answer was more interesting than I expected.

I am not a Washington employer. I am a California-based payroll software developer serving Washington customers — employers and their bookkeepers and accountants — through Medlin Payroll. I notice policy quirks like this because I have to write code which implements them. I also have had tipped workers in my family, so I have some personal appreciation for how tip income actually works — and how it feels to watch it disappear from a calculation supposed to be about a paycheck.

Developer view plus a family view of what tipped work actually looks like — this one bugs me. It is bad policy, and it is the kind of bad policy which stays in place because nobody whose daily life it affects spends time reading the statute.

How the math actually works

Here is an illustrative example. Suppose a tipped worker in Washington earns the 2026 state minimum wage of $17.13 an hour. Thirty hours a week, forty-eight weeks a year — a typical full-time server schedule in the restaurant world — works out to about $25,000 in hourly wages. Now suppose they wait tables at a modest-priced restaurant, averaging roughly 2.5 tables an hour across their shifts, an $80 average ticket, and a typical 15–20% tip. That comes to about $50,000 a year in reported tips. Total W-2 wages: $75,000.

Tips are about 67% of total income in this example. In a state like Washington with no tip credit — where employers must pay the full minimum wage before any tips — a ratio in that range is normal, not exceptional. In a tip-credit state where the base wage can drop as low as $2.13 an hour federally, the tip portion can equal or exceed the hourly wage portion entirely.

For unemployment purposes, subject wages are $75,000. Lose the job, the benefit is calculated on the whole amount.

For PFML, subject wages are $25,000. The premium works out to about 1.13 cents per dollar of wages — roughly 0.81 cents paid by the worker, 0.32 cents paid by the employer. Need to take family leave or medical leave, the wage-replacement benefit is calculated on $25,000 — not actual income.

For WA Cares, same thing. Premium is about 0.58 cents per dollar, applied to $25,000 instead of $75,000. (WA Cares is employee-paid only — no employer contribution.)

The employer savings are the part which usually goes unmentioned. At 0.32 cents per dollar of wages — $3.23 per $1,000 — every dollar of excluded tips is a dollar the employer does not owe those 0.32 cents on.

The savings scale with tipped payroll. A small diner with $50,000 a year in reported tips saves about $160 a year — not nothing, but not transformative either. A hotel or restaurant group with $2 million a year in reported tipped wages saves roughly $6,460 a year. A large chain with $20 million saves about $64,600. This helps explain why the biggest members of a trade association have more reason to fight for a carve-out than the smallest ones do — and why the resulting statute tends to reflect what the biggest negotiators wanted.

Put another way, the employer savings amount to about 0.32% of excluded tipped wages — roughly a third of a cent per tip dollar. Not a number anyone would call dramatic in isolation. But industry lobbying does not chase dramatic numbers; it chases consistent, permanent, unopposed savings across every member, every year. A third of a cent per dollar, applied to the entire tipped-payroll footprint of Washington’s restaurant and hotel industry, across nine years and counting, adds up without ever having to fight the same fight twice.

One more wrinkle: employers with fewer than 50 employees are exempt from the employer share of PFML premium entirely. So for a small independent restaurant which never hits 50 employees, the tip exclusion saves the employer nothing, because they were not paying the employer share to begin with. The carve-out delivers zero relief to the smallest operators and meaningful relief to the largest ones. This distribution is worth noticing.

Unlike the worker “savings,” the employer savings have no matching benefit cut on the back end. Employers just pay less.

At first glance, excluding tips sounds like a tax break for tipped workers. Pay less in, right?

Except the benefit gets cut too. PFML uses a sliding-scale formula tied to Washington’s state average weekly wage. For 2026, that average is $1,830 a week. Workers earning below half of that (under $915/week) get 90% of their weekly wage replaced. Workers earning above it get 90% of the first $915, plus 50% of anything above — up to a maximum weekly benefit of $1,647.

Plug the example worker into both versions:

If tips were counted ($75,000 ÷ 52 = $1,442 weekly wage): benefit = $823.50 + $263.66 = $1,087 per week.

As Washington actually calculates it ($25,000 ÷ 52 = $481 weekly wage): benefit = 90% of $481 = $433 per week.

The difference is $654 every week of leave. Over a 12-week medical leave, the worker loses about $7,850 in benefits they would have received if their full income counted. Over 18 weeks of combined leave for a new baby plus a medical complication, the shortfall runs to roughly $11,800. The PFML check comes in at 40% of what it would be if Washington did what every other state does.

For the worker, that is not a small number. For many tipped workers, it is the difference between being able to afford leave and having to go back to work before they should.

WA Cares is different — the long-term care benefit is a flat $36,500 regardless of what anyone earned. So tipped workers pay a smaller premium for the exact same benefit everyone else gets. This part is genuinely favorable to the worker. But it is the only piece which is.

Who this actually affects

Tipped work in Washington is concentrated in food service, hospitality, personal care, and similar jobs. These jobs have some characteristics worth noting:

• Higher rates of physical injury than desk work
• Irregular schedules which make caregiving harder
• Less access to employer-sponsored disability or family leave benefits

In other words — the people who are more likely to need paid family leave or long-term care. Not less likely. More.

Washington’s program design effectively says to tipped workers: we will take your premium on the small part of your paycheck, but when you need the benefit, we will pretend the tip half of your income did not exist.

For employers with tipped staff, the same program design means running a payroll where two of three state-mandated social insurance programs treat your employees as if they earn half of what the W-2 says. The employer saves a little on the employer-share premium. The employee may not realize their benefit exposure has been cut.

How this got written into law

Washington’s PFML program was created by SSB 5975 in 2017. The bill skipped the usual public hearing process. There was a hearing on a different, earlier bill (SB 5032), but not on the actual text which passed. The Washington Policy Center reported at the time: “no public hearing was held on the policy provisions of SB 5975.”

The bill came out of closed-door negotiations between legislative leaders, labor unions, and business lobbyists. The Washington Hospitality Association — the statewide trade group for restaurants and hotels — was one of the negotiating parties. Their current website describes the outcome, including the tip exclusion specifically.

Why were business groups at the negotiating table? Because labor had threatened a ballot initiative which would have been more generous to workers. The Senate committee chair at the time, Sen. Michael Baumgartner, said on the record every business lobbyist he spoke with told him the same thing: we do not like the policy, but we are afraid of an initiative. He called it “legislative coercion.”

So both sides gave. Labor got a mandatory statewide program instead of years of ballot fights. Business got concessions — including carving reported tips out of the wage base. The legislature got a bill they could pass without a messy public hearing. The restaurant and hotel industries got to lower their employer-share premium costs on their largest worker category.

The workers whose tip income was excluded from their own benefit calculations did not have a seat at the table.

It got worse in 2019

Two years later, the legislature created WA Cares with HB 1087 (the LTSS Trust Act). Rather than debate wage definitions fresh, the statute just points at the PFML rule and says use the same definition. The 2017 tip exclusion was imported into long-term care without anyone appearing to ask whether it made sense for a completely different kind of program.

Paid family leave is at least wage-replacement — you could make a weak argument that excluding tips lines up with excluding the benefit. Long-term care is a flat benefit. There is no wage-replacement logic to apply. But the exclusion got copy-pasted anyway.

This is the quiet part. The tip exclusion was not a principled policy choice about long-term care. It was leftover language from a 2017 negotiation nobody bothered to revisit.

What the hospitality industry actually got

Before going further, a fair acknowledgment: restaurant and hotel owners had real reasons to negotiate in 2017. Small operators genuinely struggle with new payroll mandates on top of rising minimum wage and paid sick leave costs. Without business buy-in, the program might have looked very different — more generous to workers, yes, but also more expensive for employers in ways which could have cost jobs. The point is not business groups were wrong to be at the negotiating table. The point is the specific carve-out which came out of those negotiations has aged badly and deserves a second look.

This is the business case for the carve-out. Restaurants and hotels pay lower PFML premiums than they otherwise would. Tipped workers pay lower premiums too — on paper. But when those same workers need the benefit, their wage-replacement check reflects only the hourly-wage portion of their income. The employer’s savings are immediate and permanent. The worker’s “savings” come with a matching benefit cut which only shows up years later when they actually need to take leave.

The fair counterargument

Not every argument in favor of the tip exclusion is cynical. A few points worth being honest about:

Tips are self-reported. Employers do not always have pay-period-level visibility into cash tips. Including them in subject wages creates administrative complexity, especially for small restaurants. Massachusetts handles this with a $20-a-month reporting threshold, and their sky has not fallen — but the concern is real.

The program might not have passed without business buy-in. A worse program, or no program, could have been worse for workers overall than a program with the tip exclusion.

And the WA Cares treatment is genuinely favorable to tipped workers — lower premium, same flat benefit.

These are real points. They do not add up to a convincing whole. Twelve other states figured out how to include tips in PFML. Washington could have too.

What should change

The fix is straightforward legislatively. Amend the PFML and WA Cares wage definitions to match the unemployment insurance definition. Washington already includes reported tips for UI. Align the three.

For tipped workers, this would mean:

• Slightly higher premium deductions (a few dollars a pay period for most workers)
• Significantly higher wage-replacement benefits when leave is actually needed
• The same participation in a social insurance system non-tipped workers already get

For employers, it would mean paying their share of PFML premium on the full wage base — same as employers in the other twelve states.

Neither side should find this catastrophic. Both sides found the current arrangement acceptable in 2017, but only because the alternatives — a ballot initiative, or no program at all — were worse. The ballot-initiative threat is gone. The program exists. It has paid out billions in benefits. What remains is a carve-out nobody would design from scratch, still sitting in the statute because nobody has bothered to revisit it.

Bottom line

Washington’s paid family leave program and long-term care program treat reported tips as if they do not exist. No other state with a paid leave program appears to do this. Washington’s own unemployment program does not do this either.

That was nine years ago. The compromise is still on the books. The workers who lost wage-replacement coverage on half their income may not realize it happened.

They should.

The broader point — that reflexively minimizing social insurance contributions can quietly shortchange the people depending on those benefits later — is covered in more depth in The Case for Getting Your Family to 40 Quarters. Washington’s tip exclusion is a specific state-level version of the same pattern. Another example of a payroll rule with quiet loopholes most people never see: FLSA OT (QOC) and Agricultural Employees.

Methodology: where the example numbers come from

For readers who want to check the math or plug in their own scenario:

Hourly wages: $17.13 × 30 hours/week × 48 weeks/year = $24,667, rounded to $25,000. Thirty hours a week reflects a typical full-time server schedule — most restaurant jobs do not hit 40 hours consistently at a single employer. Forty-eight weeks allows two weeks off for vacation, sick time, or slow seasons. The hourly rate is Washington’s 2026 state minimum wage; several cities (Seattle, Bellingham, SeaTac, Tukwila, Renton) set higher local minimums which would push the number up.

Tip income: 2.5 tables per hour × $14 per table × 1,440 hours = $50,400, rounded to $50,000. The 2.5-tables-per-hour average reflects the mix of busy and slow periods across a real shift — servers might turn 4–5 tables an hour during peak dinner but only 1–2 during slow periods. The $14 tip assumes an $80 average ticket at 15–20% — consistent with a modest-priced casual-dining restaurant.

Adjusting for your situation: Workers at higher-end restaurants or busier venues will have larger tip totals and a larger gap. Part-time workers or those at slower venues will have smaller numbers but the same percentage gap. The tip exclusion takes about the same bite out of anyone’s benefit regardless of scale — because the whole calculation is proportional.

PFML benefit formula: For 2026, the state average weekly wage (SAWW) is $1,830. Workers with an average weekly wage (AWW) at or below 50% of SAWW ($915) receive 90% of their AWW. Workers above that threshold receive 90% of the first $915 plus 50% of the amount over, capped at $1,647/week. The formula and figures come directly from the Washington Employment Security Department.

If your situation is not covered cleanly by this post — different industry, different wage mix, a specific claim scenario — email me. I cannot give personalized legal or financial advice, but I do read every message, and the ones that surface gaps in the article become future posts.

This blog post reflects my own analysis and how I understand the legislative history. I am a California-based payroll software developer serving Washington customers through Medlin Payroll — not a Washington resident, not a lawyer, not a lobbyist. I noticed this in the statute because payroll software has to implement it. If I have got something wrong, I want to know about it.

Figures cited in this post — premium rates, employer/employee splits, wage base caps, and benefit amounts — were accurate as of the publication date. These numbers adjust periodically for inflation, fund solvency, and legislative changes. Check the current figures at paidleave.wa.gov and wacaresfund.wa.gov before relying on anything here for your own planning.

Sources and further reading

• Washington Employment Security Department — Estimate your Paid Leave payments (2026 premium rate, employer/employee split, tip exclusion language)
• Washington Employment Security Department — Find out how paid leave works (weekly benefit formula, SAWW, cap)
• Washington State Legislature — SSB 5975 (2017) Bill Summary (Paid Family and Medical Leave enacting legislation)
• Washington State Legislature — HB 1087 (2019) Bill Summary (Long-Term Services and Supports Trust Act, creating WA Cares)
• Washington Policy Center — Labor/business compromise paid family and medical leave bill on the move (contemporaneous reporting on the 2017 closed-door negotiations and the “legislative coercion” quote)
• Washington State Department of Labor & Industries — Minimum wage (2026 state minimum wage; no-tip-credit rule)
• WA Cares Fund — WA Cares Fund (2026 premium rate, benefit amount, hours-based eligibility)