Tipped Employees: What You Need to Know

Tipped Employees: What You Need to Know

The rules regarding minimum wage, tips and overtime can get a little dicey. With states having some say in minimum wage requirements employers need to stay on top of their game to make sure they are calculating and compensating correctly. Here’s some basic information about setting your employee’s wages. 


Facts about minimum wage

The federal minimum wage is $7.25 per hour for tipped and non-tipped employees.

Federal Law

  State Law
The federal law states that employers may claim up to $5.12 per hour (a top credit) of the $7.25 minimum wage for tipped employees. However... Individual states may set different standards, so be sure to check our your state's law.
Wages and tips combined must equate to federal minimum wage of $7.25. However... If your individual state sets a higher minimum wage, you must abide by the state law.


Facts about overtime for tipped employees

Let’s say your state allows you to take the full tip credit of $5.12, how do you calculate overtime hours? Here’s an example:

  • $7.25 (minimum wage) x 1.5 (overtime rate) = $10.88 (overall overtime rate)
  • $10.88 (overall overtime rate) - $5.12 (tip credit) = $5.76 (adjusted overtime rate)
  • $5.76 (adjusted overtime rate) x 10 (hypothetical overtime hours) = $57.60 (overtime pay)

Then you just add the straight pay to the overtime pay calculated above to get your total for the week. 


Reporting Tips

Employees must report their total amount of tips if they receive more than $20 in tips per month. The report is due on the 10th of each month and must include the following information:

  • Employee’s name
  • Address
  • Social Security Number
  • Employer’s name and address
  • Period the report covers (one month max)
  • Total tips received (both direct and charged tips)

Employees can use Form 4070 report tips, employer software or another source as long as all the information above is included. 


FICA Credit

If you are in the business of providing, delivering or serving food, you may be eligible for a business tax credit. Basically, tips that exceed the minimum wage requirements can go toward the employer’s share of Social Security and Medicare taxes paid on those tips.

► What can I do with this credit?
Use it to offset any regular income tax liabilities, excluding employment tax liabilities.

► How does the credit work?
Credits are dollar for dollar reductions, but expense deductions just reduce taxable income. You can’t claim both at the same time.

► What’s the catch?
The credit is nonrefundable. So let’s say the credit brings the income tax below zero, you won’t receive a refund for the negative amount. But you can carry over the credit excess to years ahead.

Reporting tips, handling overtime pay and calculating the FICA credit can be fairly overwhelming and the importance of it is at the topmost. Find a payroll partner that has the technology to track tip reporting correctly while also saving you time by including a feature that will show a business owner how many regular and overtime hours employees are working in each department.


Tip Reporting Made Easy


Our restaurant payroll solution includes specific tip allocation reports that details employee’s hours, gross receipts; direct, indirect, declared and allocated tips allowing the business owner to not stress when it comes to payroll tax compliance in their industry. Not only does our restaurant payroll solution offer the tip allocation report, but also a labor distribution report and a Form 8027 Worksheet that will save you time and simplify administrative paperwork.

If you need some help, don’t hesitate to call or reach out to us – we can help! When it comes to payroll tax reporting and compliance, trust on us to take the pressure off your already busy day-to-day workload.

Learn more about our restaurant payroll solution today.