Under the Fair Labor Standards Act (FLSA), there are specific requirements for minimum wages and overtime. As an employer, you must pay tipped workers a minimum wage. Because of the nature of tips, you also have special obligations when it comes to recordkeeping. If you correctly record tips and withhold taxes throughout the year, you can get some of your FICA payments back through a FICA tax credit.

How Much Do Employers Have To Pay Tipped Workers? 

Tipped employees are unique because they don’t have to be paid the same federal minimum wage as everyone else. However, there are specific situations where you may need to pay workers more. Additionally, there are other overtime and state-based rules that may apply.

The Federal Minimum Wage for Tipped Workers

The FLSA requires you to pay your tipped workers at least $2.13 per hour. However, this is only applicable if the employee brings in enough tips. They legally must earn the federal minimum wage of $5.15 from tips and wages combined. If they don’t make enough tips to reach this level, you must pay the difference. 

It’s important to remember that the federal minimum wage for tipped employees is $5.15 and not $7.25 per hour. While the overall minimum wage has increased over the years, the federal minimum for tipping has not.

Overtime for Tipped Workers

Like other employees, tipped workers must be paid overtime wages. Unlike the standard minimum wage, you cannot simply multiply $2.13 by 1.5. The actual overtime wage for tipped workers is calculated using the following steps. 

• Calculate the Standard Overtime Amount: Multiply the standard overtime amount by 1.5. If your state uses the federal minimum wage of $7.25, this works out to $10.88 per hour. 
• Subtract Tip Credit: Next, you must subtract the FICA tip credit of $5.12 from $10.88, which works out to $5.76 per hour.
• Multiply This Figure by the Hours Worked: Finally, you must multiply $5.76 by the number of overtime hours they ended up working.

State-by-State Requirements Can Vary 

It is important to keep in mind that state-by-state regulations can vary. Here are just a few examples of how tipped minimum wages and overtime regulations can vary across the country.

• California has a tipped minimum wage of $16.50 per hour.
• Nevada requires employers to pay tipped workers at least $12.00 per hour.
• Ohio requires tipped workers to receive at least $5.35 per hour, but tips and wages together must equal at least $10.70 per hour.
• Alaska law expects tipped workers to be paid at least $11.91 per hour.

Employer Responsibilities for Tipped Workers 

While wages are a big part of the employer responsibilities for tipped workers, it isn’t the only obligation you must fulfill. The following are just a few added obligations that business owners must follow.

Recordkeeping

Under existing regulations, employees are required to track and record all of the tips they earn on a daily basis. Then, they must report them to you. On a practical level, this means you’ll need to record any tips your employees report so that you can accurately withhold and pay payroll taxes.

To make this process easier, you may want to consider investing in payroll software or a high-quality point-of-sale (POS) system. Instead of relying on employees to report their tip earnings directly to you at the end of each night, you can automatically track tips in the POS or have employees enter their tip earnings in tip management software before they clock out.

Reporting Tips

Employees must report the tips they make to you, although you can make this process easier through tip management software. Once they report their tips, you’re required to retain a copy of their tip reports.

There are other forms and information you must track as well. For example, you must record the amount distributed to each worker if your company distributes service charges to employees.

Collecting and Paying Taxes on Tips

As the employer, you are required to withhold Social Security and Medicare taxes from the employee’s tips. Additionally, you are expected to withhold income taxes. Most employers are also obligated to turn in federal unemployment tax return (FUTA) payments, although FUTA taxes are only paid by the employer. 

Even though your small business can’t control how much employees earn in tips, you’re still obligated to pay the employer’s portion of FICA and FUTA taxes. When it comes to the employee’s portion of FICA taxes, there is an upper limit to how much you have to pay out. You’re only obligated to withhold taxes for up to the amount of the employee’s wages. If the employee’s wages aren’t enough to cover their share of FICA taxes and income taxes, you must apply the wages to their tax obligation in the following order.

• First, prioritize the employee’s FICA taxes for their non-tip earnings.
• Then, withhold taxes for the employee’s non-tip payments. 
• Next, cover the employee’s FICA taxes on their tip earnings.
• Finally, use whatever funds remain for the employee’s income tax on their tip payments.

Tracking Tip Taxes for FICA Credits

Businesses can potentially save money on their taxes through a FICA tax credit. Basically, this credit covers the FICA taxes you have to pay on an employee’s tip payments. 

However, there’s an important caveat. You cannot get a tax credit on the tips that were used to make up the employee’s minimum wage. On a federal level, you’re allowed to pay a tipped worker $2.13 per hour as long as they earn enough tips to reach the federal minimum wage of $5.15 per hour. Any tips that make up the $3.12 difference between these two figures are ineligible for the FICA tip credit. Any FICA taxes paid on tips after the employee’s combined earnings are at $5.15 an hour are eligible for the FICA tip credit.

To avoid an audit and maximize your tax savings, you must carefully track all of your employee’s tips and wages. You can generally make this process easier by working with a top payroll provider. At Asure Software, we give you all of the information you need for Form 8846, so you and your CPA can spend less time figuring out which tax payments are eligible for the FICA tip credit.

Ensuring Employees Are Paid a Minimum Wage

Whether you are managing tipped employees or non-tipped workers, you have an obligation to pay your team the minimum wage. You must carefully calculate each employee’s tips to ensure that the tips and their wages add up to at least the federal minimum wage. Otherwise, you may face penalties and fines for violating the FLSA. 

How a Payroll Provider Can Help With Your Tip Obligations 

When you partner with a leading payroll provider, you can get support with tracking tips and calculating tax withholding. By outsourcing your payroll services to a payroll professional, you can have more time to focus on what you do best. 

To learn more about your tip-related obligations as a small business, reach out to our team of small business payroll and HR experts today.