Calculating payroll is a highly complex process, especially in businesses where employees earn tips. The operation’s accountants have to determine wages, taxes, and tip credits for nontipped and tipped employees; calculate and make up minimum wage shortfalls; and calculate the FICA tip credit. That’s a lot of computing.
State minimum wage laws
State minimum wage requirements vary, but by law, every employee in a restaurant must make the prevailing minimum wage for every hour they work. This means, if you operate in a state that uses the Federal Labor Standards Act (FLSA) federal minimum wage, your employees have to earn enough in tips that the cash wage you pay plus their tips is equal to the state’s minimum wage or the FLSA minimum.
For example:
In Arkansas, the minimum wage is $11.00 an hour. A restaurant using the tip credit model of compensation pays $2.63/hr. cash wage and the other $8.37 must be made up with tips. If it’s not, the operator is responsible for the difference to bring the worker up to the minimum wage for every hour worked.
A handful of states do not have a tip credit.
- Alaska
- California
- Minnesota
- Montana
- Nevada
- Oregon
- Washington
Some states mandate that employers pay their tipped employees a cash wage above the Federal requirements (currently $2.13/hour).
- Arizona
- Arkansas
- Colorado
- Connecticut
- Delaware
- District of Columbia
- Florida
- Hawaii
- Idaho
- Illinois
- Iowa
- Maine
- Maryland
- Massachusetts
- Michigan
- Missouri
- New Hampshire
- New Jersey
- New Mexico
- New York
- North Dakota
- Ohio
- Oklahoma
- Pennsylvania
- Rhode Island
- South Dakota
- Vermont
- Virgin Islands
- West Virginia
- Wisconsin
Other states have a cash wage equal to FLSA at $2.13.
- Alabama
- Georgia
- Indiana
- Kansas
- Kentucky
- Louisiana
- Mississippi
- Nebraska
- North Carolina
- Puerto Rico
- South Carolina
- Tennessee
- Texas
- Utah
- Virginia
- Wyoming
Who’s considered a tipped employee?
According to the Department of Labor (DOL), federally speaking a tipped employee is one who repeatedly receives more than $30 a month in tips (regardless of their position) but this rule can vary by state. All tipped employees must make at least the prevailing minimum wage for every hour worked when their employer paid cash wage and tips are combined.
A tipped employee must still make federal minimum wage of $7.25 an hour, but as much as $5.12 of that minimum wage can be earned through tips.
What’s the hourly tip credit?
The operation can apply a portion of employees’ tips toward its obligation to pay them the hourly minimum wage. If the employee does not earn the difference in tips, then the tip credit will not be enough to meet minimum wage requirements and the operation is responsible for making up the difference in the tip shortfall. To ensure the accounting is accurate, a best practice is to set up a daily tip report system to track tips. A quality payroll provider allows tips to be keyed in or imported directly into the operation’s paygrid.
What is the FICA Tip Credit?
The FICA Tip Credit was created to offer a bit of tax relief to businesses that pay employment taxes on tip income. The FICA Tip Credit is calculated as 7.65% of any tips claimed over $5.15 per hour. If a restaurant owner uses the credit, it may help them save hundreds of dollars each year per employee.
A high-quality accounting system can automatically calculate the FICA Tip Credit and provide the business with the Tip Credit detail report that is required to report taxes. (IRS Form 8846.)
Employee tip reporting
Employees are required to report all wages and tip income to their employers in addition to the IRS. The IRS says that the employer is responsible for ensuring that all of the tip income that employees report during a pay period equals at least 8% of the restaurant’s total receipts during the same pay period.
If the total amount of tip income the employer reports is less than 8%, they’re required to make up the difference using one of two methods: gross receipts or hours worked.
- Gross receipt method — Compares gross receipts (the total amount of revenue your business receives from all sources without subtracting expenses) to your total restaurant receipts to determine how much tip income an employee should have reported.
- Hours worked — Companies that employ fewer than 25 full-time equivalent employees can use this method to allocate tips. In this case you use the total number of hours an employee works during a pay period rather than the number of sales they make each hour.
At the end of the year if the employee has not claimed 8% of gross receipts, the business will allocate tips to the employee in box 8 on Form W-2. Businesses report the claimed tip amounts annually on Form 8027.
How to calculate overtime
Overtime is calculated on the full minimum wage, not the cash wage minus the tip credit. For example, citing the earlier Arkansas restaurant: state minimum wage is $11 an hour, and the cash wage for tipped employees is $2.63. Overtime hours are paid at time and a half so the wage would be $16.50 not $2.63. Watch the National Restaurant Association’s webinar for more information about the DOL’s proposed overtime changes and how they may affect restaurants.
How Paycor Helps
It’s clear that restaurant payroll accounting can get very complicated, especially when dealing with myriad minimum wage rates, tipped vs. nontipped wages, and tip and tax credits. There’s no need to go it alone. In fact, most restaurant owners seek outside help to run payroll, either by hiring an accountant or using a restaurant payroll service. The best way to help ensure your operation is properly calculating payroll tax, staying compliant with labor laws, and getting all the tax credits and benefits possible is to get expert help.
