QuickBooks Small Business

Accounting & Payroll Issues for Restaurant Tips and Service Charges—Part 2

Written by Stacey Byrne

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.

Stacey Byrne will present the session, TAKE CONTROL: MANAGING DIFFICULT CLIENT RELATIONSHIPS, at Accountex 2017.

Payroll Considerations

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.

Minimum Wage

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.

Payroll Setup

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.

Restaurant Tips and Service Charges

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:

Tax tracking type

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:

Add additional pay types

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.


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About the author

Stacey Byrne

Stacey Byrne (@SLByrneCPA) is a practicing CPA with 25 years' experience consulting with a variety of small to medium-sized businesses including restaurants, construction companies, law firms, and not-for-profit organizations. She is the co-author of Restaurant Accounting with QuickBooks, with Doug Sleeter. Stacey has worked as a staff accountant at the Iacopi, Lenz & Co. CPA firm, and is the former director of finance for a management company where she oversaw accounting and payroll for multiple facilities, including a sports/entertainment arena, theater, ice rink, and ballpark. She is a former adjunct professor of QuickBooks at San Joaquin Delta College in Stockton, California.

Stacey holds several Intuit certifications in QuickBooks (Advanced Desktop, Advanced Online, and Enterprise). She is a certified Sleeter Group QuickBooks consultant and a certified Xero Partner.

Stacey holds a B.S.B.A. degree in Accounting from California State University, Stanislaus, and is currently in pursuit of her M.S. Ed. degree in Online Teaching and Learning at California State University, East Bay. She is also a member of several professional organizations, including the California CPA Society, Sleeter Group Consultants Network, and the Woodard Network.

When she is not writing, working with clients, or studying, you will likely find Stacey at a San Francisco Giants game or enjoying family time with her two sons.

29 Comments

  • This has been a wonderful two part series. I don’t normally work with restaurants, but sometimes questions come my way and it is great to have such a good overview.

  • I know there was a part 1 to this series. I thought I had saved it to print, but now I can’t find it. Can you tell me when it was sent? Maybe I can find it. Hate to be a bother. Thanks.

  • A lot of companies won’t count the actual amount of tips going toward an employee, but simply use a blanket policy to pay their tipped employees the lowest possible amount, and hope the tips bring the employee up to the minimum wage. Unfortunately, if the business slows down, and the employees don’t earn enough in tips, that could cost the business significantly. Maybe they could simply pay the employees the minimum wage, and avoid minimum wage tipping laws altogether. Considering they’re working hard to deliver a good experience to the customer to keep them coming back and spending their money at the business, you would want to make sure you retain quality employees, and paying them $#.00 per hour isn’t going to get you a quality employees.

  • Hi Stacey Byrne,
    I am a CPA.I read your both article about “Accounting & Payroll Issues for Restaurant Tips and Service Charges” Part 1 &2.It’s really awesome.In the part 2 you suggestion about (Tips Paid in Cash) is very good.Your both part article is very useful & helpful to small business.
    This information is very much valuable. I like this article thank you for this wonderful article.
    With best of luck for other new post
    David Wooks

  • Hi Stacey,

    Great set of articles.

    So on the P&L, what would you see for the company’s wage expense? The amount on Line 1 (in aggregate for all employees)?

    That’s what seems like it is being reported on the quarterly reports, at least from my payroll system (Gusto).

    • Kevin,
      Thank you. Glad you enjoyed the articles.

      Are you talking about Line 1 on the 941? (I think you mean Line 2) or Box 1 on the W-2?
      In either case, the wage expense on the P&L does NOT include tips, so you can’t tie the P&L to 941 Line 2 Wages or W-2 Box 1 Wages. You have to subtract total tips to arrive at Wage Expense.

      • Yes Line 2 on the 941 which usually matches our W-2 Box 1’s in aggregate (I think).

        So for all non-tipped clients, our client P&Ls have a wage expense which DOES match the 941 report. And you are saying that for restaurants and similar “tipped” companies it would not? Thanks for clearing this up. Here is my example:

        P&L (wrong way?)
        Payroll
        – Wages $50,000
        – Tips $10,000
        Total Payroll -> $60,000 (This number matches 941 Line 2)

        P&L (right way?)
        Payroll
        – Wages $50,000
        Total Payroll -> $50,000 (Does not directly match 941 Line 2)

  • How are the tips taxed correctly this way? It says the servers get all the tips recorded for taxes including what gets paid out to bartenders and cooks… So for example they make $100 in credit card tips and pay taxes on $100 but the servers are required to pay out $25 to other employees at the end of the night. So they are paying the taxes on their tips and all the other employees tips but the other employees aren’t paying the taxes for any tips. This adds up where servers pay $5,000 or more in taxes a year on tips they never received. This doesn’t seem right?🤔

  • Hi Stacey, I really liked your article. I am relatively new to Quickbooks, I am the owner of a restaurant and I am finding difficulty in tracking tips. We use an outside payroll company to process payroll currently. I have purchased the Sleeter Group Restaurant Accounting with Quickbooks book but it really does not clearly discuss setting up payroll with an outside company. I am using QB Pro 2015 desktop. I cannot set up Payroll Items without signing up for QB Payroll. Is there another method to set up Tips for payroll Purposes?? Thank you

  • Laurie,
    If the tips have already been paid in cash, there is no need for anything to hit the books as it relates to tips and payroll when using a third party processor. If you look at page 2 of this article, there is information on accounting for payroll and what the JEs should look like.
    Stacey

  • Hello
    Thank you for the article. I have just one question.

    If an employer puts an employee on W-2(as opposed to contract labor 1099), the employer will end up paying a portion of the employee’s taxes.

    Does this also apply for tips? For example, an Employer “A” who paid an employee 50k a year for a job, pays (X) amount in taxes on behalf of the employee. Will the amount paid in taxes by Employer “B” be the same if Employer “B” paid employee 35k, and the employee got an additional 15k in tips from customers?

  • First, you said “employer will end up paying a portion of the employee’s taxes”. This is incorrect. The employee pays their share of income taxes, social security taxes and medicare taxes. The employer pays their share of employer social security and medicare (in addition to other employer taxes). The employer isn’t paying a portion of the employees taxes.

    Second, as for taxes applying to tips, yes tips are subject to all of these taxes. Certain employers may be eligible for the tax credit, discussed on page 3, but that depends on a lot of factors. Best to seek advice from the restaurant owner’s tax preparer.

  • So We just found out about this as a company. We are a Florida company and the tip minimum in Florida is $5.23 with regular minimum at $8.25 so we can take a tip credit of $3.02 to meet minimum. We have been paying matching taxes on all tips.
    The way I am understanding this and I could be wrong that why trying to understand. Because all out employees are over $5.15 we could apply for credit on all tips ?
    All of my employees make at least $5.23.
    So if employees received $50000 in tips for year my credit would be $3825 ?

    • Best to discuss this with your tax preparer. There are some instances where you may not be eligible for the full credit, such as if you have a loss. However, many CPAs and tax preparers are unaware of this lucrative credit. It is worth asking them to research

  • Great analysis both of how complicated restaurant and tipped employee payroll can be, but also how important it can be for restaurants to take advantage of available tax incentives to stay viable and turn a profit.

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