Don’t Make These Mistakes When Tipping Your Employees
[Originally posted on Upstart.bizjournals.com.]
Employees in a variety of service occupations receive tips from customers, and they must record and report those tips to their employers.
If you employ tipped workers, you also have a number of obligations for tip reporting and should avoid the following four errors.
1. Service charge error
One error is counting service charges as tips. Tips are given by a customer directly to an employee in the form of cash or extra charges on credit card receipts. The customer must have complete discretion to determine the amount of the tip.
A fixed amount or percentage added to a customer’s bill is a service charge, not a tip — even if that money is later given to employees. Service charges cannot be counted toward the tip credit. They are treated like commissions for wage and tax purposes, and they also affect overtime rates.
You may be able to claim a tax credit for the Social Security and Medicare wages paid on tips, but you cannot claim such a tax credit on service charges. For more information, see IRS Publication 531, Reporting Tip Income, and IRS Tax Topic 761, Tips – Withholding and Reporting.
2. Tip credit error
Improperly applying the tip credit is another common error. The Fair Labor Standards Act (FLSA) allows you to pay an hourly rate below the minimum wage and count the reported tips as a credit toward the minimum wage. If an employee’s tips are not sufficient to reach the minimum wage, you must provide additional compensation. The FLSA allows paying as little as $2.13 per hour, but that amount can be used in only 17 states.
Seven states don’t allow a tip credit, so you’d have to pay the full minimum wage, regardless of how much employees receive in tips. Another 26 states (plus the District of Columbia) require paying tipped employees a cash wage above the federal amount. Note that many states also have minimum wages higher than the federal rate.