Employer’s guide to tipped wages and reporting: Everything you need to know for 2024

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 — then 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 2024?

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. Also, if you are interested in previous

The chart below was last updated: 01/05/2024

*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.

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:

1. • 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.

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.