As the summer season continues to heat up, tips for your seasonal workers could be too.
Even if you’re not a seasonal business, but you have tipped workers as part of your staff, there are a few key things you need to know to stay compliant.
First, we’ll explain what you need to know as an employer, and then we’ll go into tips to pass along to your employees on reporting and recordkeeping.
Tips on tips for employers.
First things first.
What is considered a tipped employee?
If your employees ‘customarily and regularly’ make more than $30 per month in tips, they are considered a tipped employee. This means they are subject to special circumstances under federal law as well as certain state standards.
As an employer, you are prohibited from using an employee’s tips for any reason other than as credit against its minimum wage obligation to the employee (tip credit). According to this fact sheet from the DOL, only tips actually received by an employee may be counted when determining whether the employee is a tipped employee and in applying the tip credit.
The federal minimum wage standards, which includes those covering tipped employees, are contained in the Fair Labor Standards Act (FLSA). More than 100 million U.S. workers are covered by the FLSA.
Can you pay less in wages if employees receive tips?
Under federal law, you’re only required to pay $2.13 per hour in direct wages if that amount combined with the tips received at least equals the federal minimum wage. Many states, however, require higher direct wage amounts for tipped employees. This map from the Department of Labor provides a breakdown of the standards for your state.
During slow periods: If your employee’s tips combined with your direct wages do not equal the federal minimum hourly wage, you are responsible for making up the difference. Again, consult your state’s laws for the most accurate requirement.
Tip pooling is easier for me to keep track of. Is this allowed?
Under the FLSA, tip pooling or tip sharing arrangements are allowed among service employees who typically receive tips. Tipped employees may not be forced to share their tips with employees who do not customarily and regularly participate in tip pooling (such as cooks, janitors, etc.)
There is no maximum percentage of tips for a mandatory tip pool, but employers must notify tipped employees of tip pool contribution requirements.
I have some employees who work as both a server and a hostess. How do I manage these tipped and non-tipped roles?
The tip credit is available only for the hours the employee spends in the tipped position. You are allowed to take tip credit for the employee’s time spent in duties related to the tipped role, even though those duties themselves aren’t directly producing tips.
Do your employees have to report and pay taxes on tips?
If the employee receives more than $20 a month in tips, the tips count as income that must be reported and taxes paid. Cash tips and credit card tips are all included. The law requires that employees report and pay taxes on 100% of the tips they keep after tip-outs.
Employers can receive a corporate tax credit by paying (through an hourly rate and tips reported) a rate that’s higher than $5.15 per hour. For more information about this FICA tip credit, click here.
FICA Tip Credit Calculator
Simply enter a few average numbers on a per employee basis to calculate your FICA tip credit.
Tips on tips for employees.
Employers, you’ll want to pass this section along to your staff. The IRS provides some great information for them to use.
Note: Generally, income received in the form of tips is taxable, so use this information for correctly reporting income.
Indicate all tips on a tax return.
You’ll need to use Form 4137 to report the amount of any unreported tip income to include as additional wages. That would include the value of non-cash items someone receives as a tip, like tickets to an event.
Report all types of tips.
You must pay tax on all tips received during the year, including those:
- That come directly from customers.
- That are added to credit cards.
- That come from a tip-splitting agreement with co-workers.
Report tips to your employer.
If you receive $20 or more in tips during any month, you must report those tips to your employer by the 10th day of the next month. Don’t forget that includes cash, check, and credit card tips received. Your employer must then withhold federal income, Social Security, and Medicare taxes on the reported tips.
Keep a daily log.
It might be helpful to you to use Publication 1244 from the IRS to record your tips. It will help when it comes to reporting the correct amount of tips on your tax return.