Do you work in the service industry? Do you manage the distribution of tips among your employees?
If so, you’ve come to the right place. Deciding how to split tips between your employees isn’t easy and figuring out how to map and track these logistics is even more confusing.
But, you don’t have to worry. You’ve come to the right place.
We’re going to talk about everything you need to know when it comes to managing tips as an employer. Just keep reading.
What Is Considered a Tip?
In order to properly allocate tips, you need to understand what income actually counts as tips. Many businesses and individuals split up too much money or don’t split up enough simply because they don’t understand what a ‘tip’ actually is.
In order to count as a tip, the income must meet all of the following criteria:
- The money must have been given out of the payer’s own free will, meaning that the payment must not be mandatory or coerced.
- The payee must determine the amount paid.
- The payee decides who receives the payment.
- The employer cannot negotiate or dictate the amount paid.
That being said, we should clarify that tips are different than service charges. For example, many restaurants charge tables of more than ten people a 20% gratuity. Because it is mandated, this is a service charge rather than a tip.
Are Tips Taxable?
You are required to report cash tips if the amount totals more than $20 a month. Tips at this amount are subject to federal income tax as well as FICA, which is composed of Social Security and Medicare taxes.
Even though the employee is the one who receives the tips, you have to gather the information regarding how much tip they’re receiving. You should report the amount of tip on each employee’s W-2. Make sure that you’re using the correct amount of tip with the correct employee.
If an employee makes more than $200,000, they are subject to the additional Medicare tax which totals an additional 0.9% in taxes.
Employees are responsible for keeping a record of the tips they receive so that they can update their manager. The manager is required to report the income. The IRS recommends reporting by the tenth day of each month.
How Do I Allocate Tips?
The employee can keep all of his/her tips. You may also pool tips between employees.
When an employee is tipped on a credit card or debit card, you have to give them the amount tipped. However, you can remove the fee charged for using the credit card.
Be mindful that you cannot bring an employee’s pay below minimum wage. This means that you may not remove a credit card fee from their tip if doing so will bring them below the minimum wage set in your state.
Also, you have to make sure that the employee is paid these tips made from debit and credit cards by the next payday. This is true even if you have not received a reimbursement from the credit card company yet.
How Do Tips Affect My Employees’ Total Pay?
As we said before, you must not go below minimum wage. That being said, there are some considerations that you have to take into account.
The difference between the required cash wage and the minimum wage must be made up by tips. If the tips do not fill the difference, you must make up for that difference up until said employee hits the minimum wage.
If the employee in question has worked overtime, they are eligible for the overtime pay rate. If so, you are responsible for paying them their overtime pay in full.
Diving Deeper Into Cash Wage
Let’s dive into cash wages to make sure that you understand how managing tips works.
First, you have to pay each employee who is eligible to earn tips $2.13 per hour. This is the current federal required cash wage.
Next, the employee should report their tips to you, the employer. You should take the amount that they give you and add that to the $2.13 per hour that we previously stated.
If these two numbers together meet or exceed the minimum wage for your state, you’re fine. However, if those two numbers together are lower than the minimum wage for your state, then you as the employer must provide the difference.
Before compensating your employees, you should do some research on what your state requires.
Some states have different minimum wages for service workers. Some states have a higher required cash wage. Some states require a tipped employee to be paid their full minimum wage before tips are counted.
How Do I Pay Taxes on Tips?
First, you have to collect your employees’ tip income reports. Again, it is the responsibility of your employees to report their tips to you. Include all of the tip income that you have collected on the employee’s payout for each payment period.
Next, calculate and withhold the cost of income tax and FICA tax on tip income that you’re counting in their tip income. Keep in mind that tip income is subject to the maximum Social Security limit and the additional Medicare tax.
Include the employee tip income as well as the amount you withheld in the payroll tax reports. This includes Form 941 (quarterly tax report) and Form 940 (annual unemployment tax report).
In the case that you are audited, you should keep your employees’ payment records on file.
More on Managing Tips
After reading all of that information on managing tips, you should feel great about understanding what income counts as tips, how that income works with hourly pay, and how you should be taxing that income.
You’re an expert now! You can handle payroll for your tipped workers like a professional accountant.
But, there are always ways to improve your strategy. By using a payroll card like ours, you can make managing your employees’ payrolls easier than ever.
Be sure to check it out today. Your employees will love it.
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