How to Figure Out Payroll for Tipped Employees
Employees who receive tips as a regular part of their compensation generally receive a much lower base rate as defined by the IRS. This is known to the employer as a tip credit. The tip credit is designed to allow employers to pay a regular hourly employee less money per hour by calculating their tips into their pay, so long as the total pay is equal to or greater than the posted minimum wage requirements.
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Instructions
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How to Figure Out Payroll for Tipped Employees
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Calculate the amount of tips received by the employee. This can be accomplished on a daily or weekly basis. The employer needs to have a thorough accounting of all the tips the employee receives in order to properly calculate the tip credit.
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Determine the minimum wage rate. Employers must use the minimum wage rate set forth by the jurisdiction in which they reside as long as it is equal to or greater than the federal minimum wage rate. This information can usually be found on your state's web page or at IRS.gov.
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Divide the total amount of tips by the number of hours worked. This gives you the per-hour rate of the tips earned. The easiest way to figure this is to use the total of the accumulated tips for the week. For example, if an employee makes $200 in tips for the week and has worked 40 hours that week, the per-hour rate in tips for that employee is $5.00.
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Add the calculated per-hour rate to the employer minimum base rate of $2.13. Continuing the foregoing example, the employer would add the $5 per-hour rate to the base minimum rate of $2.13 to come up with an hourly rate of $7.13. As long as this amount is above the minimum wage statutes, the employer does not have to pay the employee any additional wages. If this rate is short of the minimum wage guidelines, the employer must make up the difference.
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Tips & Warnings
Keep very good records regarding the tips your employees receive in the event of an audit.
