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How to Calculate Payroll for Tipped Employees

Organizing your payroll procedures can feel overwhelming. When you add the factor of tipped employees into the equation, the whole ordeal can feel even more perplexing.

Your goal as an employer is to ensure compliance on a federal, state and local level. You want to make sure your tipped employees are earning at least minimum wage, but you don’t want their earnings to unfairly exceed your other employees who aren’t receiving anything extra. 

In this article, we’re going to peel back the layers of complexity around payroll with tipped employees. We will offer a guide covering how to calculate payroll for tipped employees.

Who Can You Consider a Tipped Employee?

There is a legal requirement to be considered a tipped employee. By law, a tipped worker must regularly receive more than $30 per month in tips.

Keep in mind that your state laws might be different, so you will want to verify with state officials to be sure.

The Process

  • Ensure You’re Paying Minimum Wage

Under federal law, minimum wage is $7.25 per hour, but this can vary from state to state (and even from city to city). All employees must be making this minimum amount. Generally speaking, if a tipped worker is not receiving the minimum wage in tips, the employer must make up the difference.

  • Consider Tip Credits

There are some states where employers can take what’s called “tip credit” against the minimum wage. In those states, an employer is allowed to credit up to $5.12 per hour composed of tips toward the minimum wage. So assuming the employer is paying at least $2.13 per hour in cash wages, that makes up the difference.

  • Receive Reports and File Reports

Your employees are responsible for reporting their tipped income to their employer if it is $20 or more. This includes cash, debit and credit card tips. It also includes tips from other employees and the cash value of monetary items. Instructions to do so can be found in Publication 1244.

  • Make Your Calculations

You are responsible for reporting tips as part of your quarterly tax return. You have to make sure that the total tip income reported is equal to 8percent of your total receipts for that specific period, at minimum.

You then need to allocate the difference between the reported tip income and the 8percent of total receipts.

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What About Overtime?

In order to qualify for overtime, it is stated in federal law that more than 40 hours have to be worked in a week. The overtime hours have to be paid at one and a half times the usual rate for their time. 

If you are using tip credit, you can’t calculate the overtime rate based on the discounted credit. You have to calculate the overtime rate based on the full hourly wage.

Smooth Payroll Processes Ensure Happy Employees

In conclusion, make sure you take the time to learn the laws and follow them closely. Be fair and considerate. Your employees’ time is valuable, and the more you recognize that, the better off you’ll be. 

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