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The minimum wage is a hot topic in the US, with many states deciding to increase it this year. What are your thoughts on tipped workers?
Employers, such as restaurants and resorts, may pay their workers who get tips for the tipped minimum wage. The federal tipped minimum wage is now $2.13 per hour, although each state has its own set of rules.
When combined, tipped minimum wages paid by the employer and tips collected must equal at least the federal minimum wage (currently $7.25 per hour; states vary). Employers will be obligated to make up the gap if this does not happen. Although paying tipped minimum wage might save money, computations can take time, and participating firms are subject to scrutiny.
What Is the Tipped Minimum Wage in Each State?
Each state has its own set of tipped minimum wages. Texas and Georgia, for example, have no special wage rules for tipped workers and instead use the federal rate. Some states (such as Florida and Colorado) have tipped minimum wage rates that are greater than the federal rate of $2.13, but Montana, Nevada, and other states do not allow tipping and require employers to pay the entire state minimum wage.
It’s worth noting that some communities have their own minimum wage that is not the same as the state-mandated minimum wage (like New York, for example). Before making any payments to your employees, double-check your state and local minimum salaries.
How Does Minimum Wage With Tips Work?
Tipped minimum wage permits employers to pay tipped staff at a lower rate. Tipped employees, as defined by federal law, are those who get more than $30 in gratuities each month on a regular basis. The following workers would be termed “tipped employees”:
- Waitstaff: The servers (waiters and waitresses) who accept food and drink orders and deliver them to clients are referred to as waitstaff.
- Bartenders: Bartenders serve alcoholic drinks from behind the bar.
- Valet parking attendants: At a high-end restaurant or hotel, valet parking employees offer a parking service to incoming guests.
Other job categories, such as chefs and hostesses, may collect tips on a regular basis as part of a tip-sharing scheme, but you cannot pay them a tipped minimum wage.
If your workers are tipped, you may take advantage of a federal tax credit of up to $5.12 per hour to lower their hourly cash rate. This equates to a $2.13 per hour federal minimum tipped pay ($7.25 – $5.12). Many states have their own tax credits that limit how much of an employee’s income may be made up of tips. This will have to be included in your workers’ salary, and it may impact the way you process payroll.
Employees who are tipped are responsible for recording and reporting gratuities from all sources, and you must submit the data to the IRS. Payroll compliance regulations may result in fines and unanticipated taxes if mistakes are made, whether intentionally or unintentionally.
Remember that the federal tipped minimum pay of $2.13 only applies to federal law; as previously stated, several states have their own tipped minimum wage rules. When there are contradictory federal, state, and municipal wage rules, always follow the ones that provide the greatest protection to workers.
Tipped Minimum Wage Laws
You will be subject to further scrutiny and reporting if you pay your state’s tipped minimum wage. You must inform all new recruits about your tip credit procedures before they start working. Furthermore, federal law mandates that you deduct payroll taxes from all gratuities, whether they are paid in cash, by credit card, or by any other method. This adds to your workers’ reporting duties since they must be open and honest about the tips they get directly from clients.
Keep in mind that, although your state may allow you to accept a tip credit, you should not feel obligated to do so. You may also choose to accept a partial credit against your workers’ hourly salary, allowing you to take benefit of the tip credit allowed while still paying minimum wage to your staff.
Provide a Notice of Tip Credit
Federal law requires you to provide your workers early notice, either verbally or in writing, of any tip credits you intend to take. Create a written notification that you may attach to their new hiring papers as a recommended practice. You should need each employee to sign the notification so that you have proof that they were given a copy.
The following information should be included in the tip credit notice:
- The tipped employee’s hourly compensation must be at least $2.13 per hour under federal law; the amount might be more based on the state’s tipped minimum wage.
- The highest tip credit is $5.12 (the difference between the minimum necessary cash pay of $2.13 and the current federal minimum wage of $7.25); the maximum tip credit may be smaller based on the state’s tipped minimum wage.
- A disclaimer stating that the tip credit you are claiming cannot exceed the number of tips the tipped employee actually got.
- A statement stating that the tipped employee is to keep all tips received, unless there is a proper tip pooling agreement; furthermore, remind the employee that supervisors are not permitted to seize control of their tips.
- A statement stating that the tip credit will not be given to any tipped employee who has not been notified of the tip credit regulations.
And, just to be clear, you aren’t allowed to collect your employees’ tips unless they specifically request it for verification purposes. If this occurs, you must return the tips as soon as possible.
Reporting of Suggestions
Reporting of Suggestions requirements is another important component of complying with federal wage laws. You’re responsible for collecting payroll taxes on the tips as you would regular wages, so it’s important that your employees track and report to you all tips they directly receive from customers (usually cash tips).
To make it simpler for your workers to report the monthly tips they get to you, you may print copies of Form 4070. You may also print copies of Form 4070A so kids can keep track of their daily recommendations in a workbook. Another check you should do is that the total tip revenue reported by your workers each month is at least 8% of their total gross sales for the same time, otherwise, you may have to pay extra money for Tips that have been assigned.
To report income, Social Security and Medicare taxes are taken from your workers’ paychecks, you’ll need to use Form 941, and to pay federal unemployment taxes, you’ll need to use Form 940. (FUTA). You’ll have to produce Form W-2 for all workers at the end of the year. It includes all salaries and tips made during the year, as well as payroll taxes withdrawn and paid, so be sure to include all wages and tips received throughout the year.
Tips that have been assigned
Tips that have been assigned are additional monies you may be required to pay if any employee’s total tips received are less than 8% of respective gross sales during the period. This is the IRS’ way of screening for unreported tip income. You must use Form 8027 to report total sales and tips received during the year and enter any Tips that have been assigned due or paid in the “allocated tip” box on employees’ Form W-2 at the end of the year. Please note income and FICA taxes are not withheld on these tips, and this requirement only applies to companies with more than 10 employees.
Conclusion
Before determining hourly compensation rates, firms employing tipped staff, particularly restaurateurs, should verify the tipped minimum wage per state. The regulations vary by state—some jurisdictions do not have a minimum wage—and any infractions may result in the business having to pay back wages and fines. Payroll services that include compliance support might be beneficial.
