Tips and gratuities are voluntary payments from a customer. Tip payments may be made in cash, by check, or charged to a credit card or “house account.” There are two categories of tips: cash and charged tips.
Cash tips are received by the employee at the time of service. The amount must be reported with wages for tax purposes, but cash tips are not included in net pay because the employee already received payment.
Charged tips must be paid no later than the employee’s regular pay day. If a client reports charged tips to Paychex, the amounts are included in the employees check.
Service charges are not tips as they are mandatory. Also, tips do not include gifts such as merchandise, tickets, or passes.
Federal law requires employees who receive $20 or more in tips during a calendar month to report all tips received. Reporting is required from any employees who receive tips, such as hair dressers, cab drivers, and casino dealers. A tipped employee is required to provide his employer with a written and signed tip statement (Form 4070 or 4070A, or a facsimile) at least monthly. Tips are taxable for FICA, federal unemployment, federal, state, and local income taxes, and state unemployment.
“Directly tipped” employees (such as wait staff and bartenders) receive tips directly from customers.
“Indirectly tipped” employees (such as bus staff, cooks, and service bartenders) do not normally receive tips directly from customers. They usually receive tips from tip pooling or splitting with other employees.
Employees of an FLSA covered employer must receive wages at least equal to the federal minimum wage or the state minimum wage (if higher than federal). Most states allow an employer to take a tip credit towards minimum wage for employees who receive tips. Each state may determine its minimum wage and maximum tip credit, but they must fall within federal guidelines. The federal minimum wage is $7.25, and the federal maximum tip credit is $5.12.
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If the state minimum wage is $7.25 and the tip credit is $5.12, the employer must pay an hourly wage of at least $2.13 ($7.25 - $5.12 = $2.13). It is assumed the employee will make enough in tips to meet the hourly minimum wage requirement. If he does not, the employer must pay the difference. |
When an employee works concurrently in a tipped position and a non-tipped position (for example, wait staff and hostess), the tip credit can only be used for the hours worked in the tipped position; however, the employee may take the tip credit for duties related to the tipped position as long as the duties are incidental (less than 20% of time) and generally assigned to the tipped position.
The tip credit amount remains the same whether the employee is working regular hours or overtime hours.
Overtime must be calculated at the employee’s regular rate. A tipped employee’s regular rate of pay can never be less than the applicable minimum wage rate. Calculate the overtime rate for a tipped employee by multiplying the employee’s regular rate of pay by the overtime factor, minus the tip credit.
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If the state minimum wage is $7.25, the overtime rate is $10.88 ($7.25 x 1.5 = $10.88). As the tip credit of $5.12 does not change, the employer pays $5.76 per overtime hour ($10.88 - $5.12 = $5.76). If $5.76 is entered as the rate in the system, the overtime factor must be overridden to 1.0. Another option is to break the $5.76 down to a straight-time rate of $3.84 and leave the overtime factor at 1.5. If the employer pays double time, the rate is $14.50 ($7.25 x $2 = $14.50). The tip credit remains $5.12, so the employer pays $9.38 per double-time hour ($14.50 - $5.12 = $9.38). |
If an employee’s tips combined with the employer’s wages do not equal the minimum hourly wage, the employer must make up the difference.
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Nikki, a tipped employee, makes $2.13 per hour. She works 40 hours this week for $85.20 in gross earnings ($2.13 x 40 = $85.20 gross earnings). FLSA minimum wage requirements state Nikki’s gross earnings must be at least $290.00 for 40 hours of work ($7.25 x 40 = $290.00). Nikki must make at least $204.80 in tips to meet the minimum wage ($290.00 - $85.20 = $204.80). Nikki only made $120.00 in tips this week. Since her tips did not make up the difference between her reduced wage and the minimum wage, her employer must pay her the $84.80 difference ($290.00 - $205.20 = $84.80). |
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To automatically pay the Tips to Minimum make-up amount, use the Direct tipped hours (126) earning code to pay a directly tipped employee his hourly rate.
For more information, check:
your state's Department of Labor for specific state wage rates
the U.S. Department of Labor’s web site at www.dol.gov
