In part one of this two-part series, we discussed the difference between tips and service charges, tip reporting requirements, and accounting for cash tips, credit card tips and service charges. In this article, I’ll examine the payroll considerations for tips and service charges and how to record payroll from an outside payroll service provider — as well as examine the employer tax credit for tipped employees, including how to calculate and file for this substantial tax credit.
It is important to understand your state’s laws around tipped employees. A simple search of “employment laws tipped employees [state]” will turn up articles on your state’s labor board website. Be careful when deciding which sites you refer to when looking up the regulations. Always get the information straight from the state. While other articles from law firms or restaurant associations may provide information that is easy to read and understand, be sure you check the advice provided in these articles with your actual state labor department. Keep in mind that there are also federal regulations that need to be adhered to regarding tipped employees.
Several states require an employer to pay tipped workers the full state minimum wage before accounting for tips while other states allow for a lower minimum wage to be paid to tipped workers. The U.S. Department of Labor provides a table of minimum wages by state.
Local governments can also require a higher minimum wage for tipped workers, as they do in Seattle, San Francisco, San Diego and many other cities. For example, in California, the statewide minimum wage is currently $10.00 per hour for employers with 25 employees or less and $10.50 for larger employers, yet the City of San Diego requires all workers be paid $11.50 per hour. A restaurant with two locations, one inside and one outside of the City of San Diego will have two different requirements for minimum wage. Idaho, on the other hand, allows an employer to pay a minimum wage of $3.35 per hour, but the employee must be paid at least $7.25 per hour after accounting for tips they received.
It is important to know what your state and local regulations are in regard to minimum wages for tipped employees. If the tips paid don’t get an employee’s wages up to the rate required by the state, the employer must make up the difference. These rates mentioned are 2017 wage rates. Rates will change every year, so make sure you are aware of the current state and local regulations.
Setting up payroll will differ based on the payroll processing provider. Some payroll solutions allow for creation of several wage items to track server wages, bartender wages, host wages, and kitchen wages, while other providers do not. QuickBooks Desktop (Pro, Premier or Enterprise version) allows for creation of several wage items that post to different expense accounts. QuickBooks Online, on the other hand, allows for different wage items, but they all post to one expense account. Make sure to choose a payroll solution that will accommodates all of the reporting necessary to effectively manage the restaurant finances.
Understanding how to add tips to paychecks can be grueling. The cash that was left on the table has already been paid to the employees, while credit card tips may or may not have been paid out to the employees. Let’s break this down into two parts: tips paid out in cash and tips that have not yet been paid to the employee.
1) Tips Paid in Cash
Whether an employee picked up the tips off the table, or the restaurant paid the credit card tips out in cash at the end of the night, the employee must report total tips received including shared or pooled tips, as described in part one of this series. The employer must include these tips in payroll so they can be taxed and added to the employee W-2 forms.
How tips are included in payroll depends on your payroll service provider. Larger payroll service providers flip a switch on the back end and a Tips field shows up on the same screen where hours are entered. The tips are added to wages for tax purposes, but they are deducted back out because they have already been paid to the employee. The process of including tips in payroll will increase Box 1, Box 5 and Box 7 wages on the W-2 forms.
If you are using QuickBooks Desktop software to process payroll, you will need to set up two payroll items to handle the taxation and reporting of the tips — Tips Addition and Tips Deduction.
Tips Addition payroll item is set up with a Tax Tracking Type of Reported Tips:
The Tips Deduction payroll item is set up with a Tax Tracking Type of None:
The Tips Deduction payroll item must be set to deduct from Net Pay:
The book Restaurant Accounting with QuickBooks by Doug Sleeter and Stacey Byrne, CPA, goes into step by step detail on setting up tips for payroll in QuickBooks Pro, Premier and Enterprise.
To set up taxation of cash tips in QuickBooks Online, add the additional Pay Type of Cash Tips to the employee payroll record. When adding a new employee, choose the Additional Pay Type “Cash Tips” as shown below:
Everything mentioned above is for tips that the server has already received in cash. This includes tips picked up off the table and credit card tips that were paid out in cash at the end of the night. Next, let’s discuss what happens when credit card tips are not paid out in cash at the end of the night.