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Employer’s guide to tipped wages and reporting: everything you need to know

Updated: August 11, 2022

By: Jon Davis

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Tips can comprise up to 58% of an employee’s salary in a service-based business. And just like any other income, tips are subject to taxes and must be taken into account when running payroll.

 

Although there are a few extra steps to follow, making sure tips are accounted for can be a relatively simple process when you have a system in place.

Let’s take a deeper dive into tipped wages, tip credits, and everything you need to know to ensure this type of income is being handled correctly.

Who qualifies as a tipped employee?

First things first: The U.S. Department of Labor defines a tipped employee as anyone who receives $30 or more in tips each month. However, a little research can go a long way since dollar amounts can vary state-by-state depending on the rules each state sets.

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What qualifies as a tip?

It’s easy to get tips and service charges mixed up, so it’s important to understand the difference between the two. A tip is a voluntary payment made to somebody for service, while a service charge or automatic gratuity is a predetermined amount you know before the bill arrives.

 

A payment is considered a tip if the:

  • Payment given is not mandated or coerced from the customer
  • Customer has the right to determine the amount
  • Payment is not dictated or negotiated by the employer
  • Customer has the right to determine the recipient of the payment

 

A service charge is an additional fee related to buying a service or product. Examples of this vary by industry and include:

  • When a gratuity is automatically included in the bill for providing service to large parties at a restaurant
  • Hotel room service charges including, for example, service charges for delivering room service
  • Banks charge service charges for maintaining checking or savings accounts
  • Airlines are well known for tacking on service charges for everything from making early seat reservations before a flight to checking your baggage

Tips and minimum wage

According to the Fair Labor Standards Act (FLSA), all covered non-exempt workers are entitled to a minimum wage of $7.25 per hour, and $2.13 for tipped employees (assuming the difference, $5.12, is made up in tips). However, minimum wages vary widely from state-to-state, as do tipped minimum wages.

 

Some states, such as California, prohibit employers from paying tipped employees a lower minimum wage than non-tipped employees. And other states, like New York, opt for a higher tipped minimum wage than the federal one of $2.13 per hour.

 

No matter where your business is located, there is one common requirement: All tipped employees must be paid at least the state minimum wage. For example, if the tipped minimum wage is set at the federal amount of $2.13 and your employee does not make enough in an hour from tips to reach the $7.25 threshold, you (as the employer) are responsible for making up the difference.

What is a tip credit?

Tip credits are another important payment approach to understand. Tip credits allow businesses to pay tipped employees a lower minimum wage than the one established by the state because you’re taking tips into account to meet the wage requirements.

 

In other words, if your employee makes enough in an hour (when including tips) to reach the state’s minimum wage threshold, the FLSA allows the employer to take a tip credit of the difference between the tipped and overall minimum wage.

 

Explained another way — this practice does not involve deducting anything from an employee’s pay, but rather is an acknowledgment that tips are being earned by the employee and as an employer you’re claiming a certain amount of that income toward the employee’s minimum wage.

 

Before taking a tip credit however, there is certain information you must provide to employees. This includes:

 

  • The amount you are paying your employees hourly — which must be at least $2.13.
  • The amount you will be claiming as tip credit (which is the difference between tipped minimum wage and the overall minimum wage). For example, if your state’s numbers align with the federal numbers — $7.25 and $2.13 — thean this can’t exceed $5.12.
  • You will not claim a tip credit that exceeds the amount an employee earns in tips.
  • The employee has the right to keep all the tips they receive unless there’s a valid tip. pooling arrangement in place (this is a system that allows tips to be allocated between employees.)
  • You will not claim a tip credit for any employee who is not made aware of these provisions in advance.

 

As you continue scrolling you’ll see tip credit information organized in a table below.

What are the state-by-state tipped minimum wage rates for 2022?

While there’s only one federal minimum wage rate, these rates vary between state, city, and county, and are often adjusted to align with the cost of living. You can always use our state-by-state resource but we’ve also put together a chart to help you keep up to date with minimum wage rates — and tipped rates — in all 50 states, including your city or locality.

 

Last updated: 08/05/2022

 

 

State 2022 tipped minimum wage (total) 2022 minimum wage rate 2022 tip credit
Alabama $7.25 $2.13 N/A
Alaska $10.34 Prohibited Prohibited
Arizona $12.80 $9.80 $3.00
Flagstaff $15.50 $13.00 $2.50
Arkansas $11.00 $2.63 $8.37
California – Small Employer (25 or Fewer) $14.00 Prohibited Prohibited
California – Large Employer (26 or More) $15.00 Prohibited Prohibited
Alameda $15.75 Prohibited Prohibited
Belmont $16.20 Prohibited Prohibited
Berkeley $16.99 Prohibited Prohibited
Cupertino $16.40 Prohibited Prohibited
El Cerrito $16.37 Prohibited Prohibited
Daly City $15.53 Prohibited Prohibited
Emeryville  $17.68 Prohibited Prohibited
Fremont (small employer 25 or fewer) $16.00 Prohibited Prohibited
Fremont (large employer 26 or more) $16.00 Prohibited Prohibited
Los Altos $16.40 Prohibited Prohibited
Los Angeles (small employer 25 or fewer) $16.04 Prohibited Prohibited
Los Angeles (large employer 26 or more) $16.04 Prohibited Prohibited
Los Angeles County (small employer 25 or fewer) $15.96 Prohibited Prohibited
Los Angeles County (large employer 26 or more) $15.96 Prohibited Prohibited
Malibu (small employer 25 or fewer) $15.96 Prohibited Prohibited
Malibu (large employer 26 or more) $15.96 Prohibited Prohibited
Menlo Park $15.75 Prohibited Prohibited
Milpitas $16.40 Prohibited Prohibited
Mountain View $17.10 Prohibited Prohibited
Novato (small employer 25 or fewer) $15.00 Prohibited Prohibited
Novato (large employer 26-99) $15.53 Prohibited Prohibited
Novato (very large employer 100 or more) $15.77 Prohibited Prohibited
Oakland $15.06 Prohibited Prohibited
Palo Alto $16.45 Prohibited Prohibited
Pasadena (small employer 25 or fewer and nonprofits) $14.25 Prohibited Prohibited
Pasadena (large employer 26 or more) $15.00 Prohibited Prohibited
Petaluma (small employer 25 or fewer) $15.85 Prohibited Prohibited
Petaluma (large employer 26 or more) $15.85 Prohibited Prohibited
Redwood $16.20 Prohibited Prohibited
Richmond $15.54 Prohibited Prohibited
San Diego $15.00 Prohibited Prohibited
San Francisco $16.07 Prohibited Prohibited
San Jose $16.20 Prohibited Prohibited
San Leandro $15.00 Prohibited Prohibited
San Mateo $16.28 Prohibited Prohibited
Santa Clara $16.40 Prohibited Prohibited
Santa Monica (small employer 25 or fewer) $15.96 Prohibited Prohibited
Santa Monica (large employer 26 or more) $15.96 Prohibited Prohibited
Santa Rosa (small employer 25 or fewer) $15.85 Prohibited Prohibited
Santa Rosa (large employer 26 or more) $15.85 Prohibited Prohibited
Sonoma (small employer 25 or fewer) $15.00 Prohibited Prohibited
Sonoma (large employer 26 or more) $16.00 Prohibited Prohibited
South San Francisco $15.80 Prohibited Prohibited
Sunnyvale $17.10 Prohibited Prohibited
Colorado $12.56 $9.54 $3.02
Connecticut $14.00 $6.38 $8.62
Delaware $10.50 $2.23 $8.27
District of Columbia $16.10 $5.35 $10.75
Florida $10.00 $6.98 $3.02
Georgia $7.25 $2.13 N/A
Hawaii $10.10 $9.35 $.75
Idaho $7.25 $3.35 $3.90
Illinois $12.00 $7.20 $4.80
Chicago (employers with 4 to 20 employees) $14.50 $8.70 $5.80
Chicago (employers with 21 or more employees) $15.40 $9.24 $6.16
Cook County $13.35 $7.40 $5.95
Indiana $7.25 $2.13 $5.12
Iowa $7.25 $4.35 $2.90
Kansas $7.25 $2.13 $5.12
Kentucky $7.25 $2.13 $5.12
Louisiana $7.25 $2.13 N/A
Maine $12.75 $6.38 $6.38
Maryland (Employers with at least 15 employees)  $12.50 $3.63 $8.87
Employers with no more than 14 employees) $12.20 $3.63 $8.57
Montgomery County (small employer 10 or fewer) $14.00 $4.00 $10.00
Montgomery County (mid-sized employer – 11-50 and certain nonprofit and service providers) $14.50 $4.00 $10.50
Montgomery County (large employer 51 or more) $15.65 $4.00 $11.65
Prince George’s County (14 employees or fewer) $12.20 $3.63 $8.57
Prince George’s County (Employers with 15 or more employees)</b $12.50 $3.63 $8.87
Massachusetts $14.25 $6.15 $8.10
Michigan $9.87 $3.75 $6.12
Minnesota (less than $500,000 annual gross sales) $8.42 Prohibited Prohibited
Minnesota (more than $500,000 annual gross sales) $10.33 Prohibited Prohibited
Minneapolis (small employer 100 or less) $13.50 Prohibited Prohibited
Minneapolis (large employer 101 or more) $15.00 Prohibited Prohibited
St. Paul (employers with five or fewer) $10.75 Prohibited Prohibited
St. Paul (employers with more than five but fewer than 101 employees) $12.00 Prohibited Prohibited
St. Paul (employers with more than 100 but fewer than 10,001 employees) $13.50 Prohibited Prohibited
Mississippi $7.25 $2.13 N/A
Missouri $11.15 $5.15 $6.00
Montana $9.20 Prohibited Prohibited
Nebraska $9.00 $2.13 $6.87
Nevada (health benefits offered) $9.50 Prohibited Prohibited
Nevada (no health benefits offered) $10.50 Prohibited Prohibited
New Hampshire $7.25 $3.26 $3.99
New Jersey $13.00 $5.13 $7.87
New Mexico $11.50 $2.80 $8.70
Albuquerque $10.50 $6.90 $3.75
Bernalillo County $11.50 $2.80 $7.07
Las Cruces $11.50 $4.60 $6.15
Santa Fe County $12.96 $3.88 $8.18
New York State – Tipped Service Employees $12.50 $15.00 $2.50
New York State – Tipped Food Service Workers $10.00 $15.00 $5.00
Fast Food Employees Prohibited $15.00 Prohibited
Long Island (Suffolk and Nassau County) and Westchester – Tipped Service Employees  $12.50 $15.00 $2.50
Long Island (Suffolk and Nassau County) and Westchester – Tipped Food Service Employees $10.00 $15.00 $5.00
North Carolina $7.25 $2.13 $5.12
North Dakota $7.25 $4.86 $2.39
Ohio $9.30 $4.65 $4.65
Oklahoma $7.25 $2.13 $5.12
Oregon $13.50 Prohibited Prohibited
Nonurban Counties $12.50 Prohibited Prohibited
Portland Metro $14.75 Prohibited Prohibited
Pennsylvania $7.25 $2.83 $4.42
Rhode Island $12.25 $4.64 $7.61
South Carolina $7.25 $2.13 N/A
South Dakota $9.95 $4.80 $4.73
Tennessee $7.25 $2.13 N/A
Texas $7.25 $2.13 $5.12
Utah $7.25 $2.13 $5.12
Vermont $12.55 $6.28 $6.27
Virginia $11.00 $2.13 $8.87
Washington $14.49 Prohibited Prohibited
Seattle – Schedule 2 Employers (fewer than 500 employees in US) minimum compensation* $17.27 Prohibited Prohibited
Seattle – Schedule 1 Employers (more than 500 employees in US) $17.27 Prohibited Prohibited
Tacoma $13.50 Prohibited Prohibited
West Virginia $8.75 $2.62 $6.13
Wisconsin $7.25 $2.33 $4.92
Wyoming $7.25 $2.13 $5.12

 

*Small employers pay an hourly minimum wage and reach the minimum compensation rate through employee tips reported to the IRS and/or payments toward an employee’s medical benefits plan. If the tips and/or payments toward medical benefits do not add-up to the minimum compensation rate, the small employer makes up the difference.

 

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Try our tax and tip calculator to tally the numbers and keep your books together.

How does tip reporting work?

It pays to remind your tipped employees that tipped reporting is important because Uncle Sam considers them taxable income. When employees don’t report tips to their employer, then the employer is not liable for the their share of Social Security and Medicare taxes on the unreported tips.The employer won’t know what’s owed until they receive a notice and demand for the taxes from the IRS. So let’s cover ways to report them.

 

  • Employees:
    • Tipped employees are responsible for reporting to their employer all tipped income of $20 or more per month, as well as the value of any non-monetary tips. An example of a non-monetary tip includes a meal provided to movers or any items of value. 
    • Employees have several options to report tips. They can use forms provided in IRS Publication 1244, or create their own custom form, or simply keep a record of tips in a notebook. Just make sure to let employees know how your business would like tip reports provided.
    • No matter what format these reports take, certain information must be included: employee name, address, social security number, the month in which the tips were received, and the total amount of tips collected.

 

Tip reports should be provided to the employer no later than the 10th of the month after tips were received. You should also advise employees to keep a copy of each report for their own records.

 

  • Employers:

Before reporting employees’ tips, you must withhold and deduct the appropriate amount of Social Security, Medicare, and income tax from their wages (also known as FICA taxes).

 

Tips are also subject to FUTA — the Federal Unemployment Tax. You are then responsible for reporting these on a quarterly basis, through IRS Form 941.

Flexibility for time-savings

“OnPay is the best online payroll. You have tremendous flexibility in designating how people are paid — hourly, tips, and commission are all possible — and with fully automated tax calculation and payments to the correct government agencies, they let me focus on doing my business instead of spending inordinate amounts of time trying to make sure I am doing my payroll correctly. “


— Ray Nyugen, Charming Nails DC

What about tipped employees who work overtime?

With a few exceptions, any employee who is paid on an hourly basis and works more than 40 hours per week is subject to overtime pay. Overtime pay is one-and-a-half times regular pay. However, for tipped workers, the process is slightly more complicated than just multiplying your employees’ hourly wage by 1.5. Here’s how to calculate overtime pay for tipped employees:

 

  1. Multiply the regular minimum wage by 1.5
  2. Subtract the tip credit you claim from the total
  3. Multiply this amount by the number of overtime hours

 

Now let’s look at an example with a tipped employee, Sarah, who worked 15 overtime hours in a week, and is getting paid the federal minimum wage:

 

  1. Take the regular minimum wage, $7.25, and multiply it by 1.5: $7.25 x 1.5 = $10.88.This is the time-and-a-half rate.
  2. Subtract the tip credit you claim, $5.12, from the total: $10.88 – $5.12 = $5.76.
  3. Multiply this amount, $5.76, by the number of overtime hours worked,15: $5.76 x 15 = $86.40.

 

In this example, Sarah would get paid $86.40 for the 15 hours of overtime worked in addition to her regular hours.

Now that we’ve covered the basics of tipped wages and reporting, you should be able to navigate the ins and outs of this important part of your business operations with confidence.  If you still need help, try this free payroll calculator, which can simplify the process for you even more and ensure you’re doing everything properly. Once you’re finished crunching the numbers, check out our guide to payroll records retention so you know what records to keep and for how long.

 

Please note all material in this article is for educational purposes only and does not constitute tax or legal advice. You should always contact a qualified tax, legal or financial professional, in your area for comprehensive tax or legal advice.