TIPPED
EMPLOYEES:
TAX, WAGE AND HOUR ISSUES
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TABLE OF CONTENTS
Introduction ..........................................................................................
5
Wage and Hour Treatment ...............................................................
9
Tax Treatment of Tips ........................................................................
17
Tip Allocations and Audits .................................................................
25
FICA Business Credit on Tips ..........................................................
31
IRS Tip Agreement Programs ..........................................................
35
Resources ............................................................................................
37
Appendix: State Charts .....................................................................
39
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Payroll Strategic Whitepapers
Payroll Strategic White Papers
Paul N. Wojcik, Chairman
Darren McKewen, President
Robert A. Shew, Vice President and Group Publisher
Gail Moorstein, Director, HR Editorial Operations
Michael Baer, Managing Editor
Michael Trimarchi, Copy Editor
Fred A. Basehore Jr., CPP , Contributing Writer
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SECTION 1: INTRODUCTION
Section 1: Introduction
INTRODUCTION
Payroll professionals working with tipped employees deal with many more requirements when compared with a typical payroll operation. The two major differences are in the key compliance areas of administering employment taxes and
applying wage and hour rules.
For taxes, much of the tax gap created by underpayment of taxes under the Federal Insurance Contributions Act is attributed to underreporting of tips. Efforts
are underway to better capture tip income information for tax purposes, and this
is adding to employer compliance requirements.
For wage and hour rules, lawsuits and enforcement actions to compel employers
to comply with the myriad compensation and recordkeeping responsibilities continue to burden employers of tipped employees.
Employers must deal not only with specific federal laws, but also various state
wage and hour laws and tax requirements. It is challenging to navigate the differences between the laws to stay in compliance, avoiding exposure to wage and
hour and tax penalties as well as lawsuits.
Beyond compliance, there is an additional element in the mix of all the administration: a business tax credit developed that allows employers of tipped employees a credit on their business tax return for the employer portion of the FICA (or
Social Security and Medicare) taxes on tips that are over certain threshold.
First, some basics, that might not be all that basic.
What Are Tips?
A fun trivia item:
What does ‘‘tips’’ stand for?
‘‘To insure prompt service’’
In general, it is not up to the employer to determine what qualifies as a tip for
either meeting Fair Labor Standard Act requirements or Internal Revenue Service
guidelines. The definitions are outlined in laws, regulations, and other guidance.
IRS interpretation of a tip is similar to that of the FLSA definition, but the purpose of the definition is different. IRS seeks to define tips for tax reporting and
tax calculation purposes; under the FLSA, tips are used to augment a subminimum wage and are used determine if appropriate total compensation meets the
minimum standards.
Under the FLSA, a tip is a sum presented by a customer as a gratuity or gift in
recognition of a service performed by a worker. However, gifts in forms other
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than money or its equivalent, such as theater tickets, passes, or merchandise, are
not counted as tips for purposes of FLSA minimum wage rules.
A tip is not a charge, according to the FLSA. Whether a tip is to be given, and
its amount, are matters to be determined entirely by the customer. A service
charge imposed on a customer, a mandatory 15 percent of the amount of the bill,
is not a tip, even if it is distributed by the employer to employees. Similarly,
where a hotel agrees with a banquet customer on a set service charge to be distributed among employees, the amounts paid employees may not be treated as
tips.
The IRS interpretation of a tip is similar, with four factors to consider:
s the payment must be made free from compulsion;
s the customer must have the unrestricted right to determine the amount;
s the payment should not be the subject of negotiation or dictated by employer
policy; and
s the customer has the right to determine who receives the payment.
The value of noncash tips, such as tickets, passes, or other items of value, while
income and subject to federal income tax, is not subject to FICA tax and does
not need to be reported to an employer.
Noncash tips are not subject
to FICA withholding.
In 2012, IRS released guidance in an effort to explain the differences between a
qualified tip for tax purposes, and a service charge, and this generally follows
the FLSA definition. Effective Jan. 1, 2014, if a tip is required on a line on a
restaurant bill, for example, when there is a large party and a minimum tip is
required, the amount is not considered a tip for IRS purposes.
Employers and employees had been characterizing those amounts as tips, and
IRS, in an attempt to change this and clarify other tip and tax-related issues, released Revenue Ruling 2012-18. In that revenue ruling, IRS provided, in a
question-and-answer format, how taxes are imposed on tips under FICA, including the difference between tips and service charges, the reporting of the employer share of FICA, and how this relates to the FICA tip credit under Internal
Revenue Code Section 45B (discussed later in this report).
Another document (SBSE-04-0612-057) provided guidelines to examiners auditing businesses where tipping is customary and where an employer adds service
charges to customers’ bills, which are then distributed to employees. The memorandum reaffirms the factors used in Revenue Ruling 2012-8 to determine
whether payments are tips or service charges.
To implement this guidance, employers may need to change their systems so
service charges that do not meet the criteria of tips are not inadvertantly considered tips for tax purposes. The effective date of the revenue ruling was delayed
from Jan. 1, 2013, to Jan. 1, 2014, to give employers time to adjust systems accordingly.
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SECTION 1: INTRODUCTION
Monthly Tip Threshold: $20 or $30?
The answer to this question depends on the law that is applied. The federal Internal Revenue Code does not define a tipped employee but requires that any employee receiving cash tips totalling $20 or more in a month report those amounts
for tax purposes. While all amounts of tips received constitute wages subject to
federal income tax withholding and taxes under the FICA and the Federal Unemployment Tax Act, the individual reporting requirement starts at $20 received in
a month.
The federal Fair Labor Standards Act, however, defines who qualifies as a tipped
employee; the main distinction being that the federal law allows employers to
pay tipped workers a cash wage of $2.13 an hour as long as the amount of tips
received averaged over the hours worked results in the worker earning at least
the $7.25 an hour federal minimum wage.
Under the FLSA, an employee qualifies as a tipped employee if he or she ‘‘customarily and regularly’’ receives more than $30 a month in tips. An employee
who shares in a tip pool or other tip-sharing arrangement is likewise considered
to be a tipped employee if he or she receives more than $30 a month from such
arrangement.
This difference between tax law and wage and hour law is not what keeps payroll professionals up at night, however. Employers can easily navigate this aspect
of administering tipped workers.
Because the employee already will be reporting to the employer when tips reach
$20 a month, the employer already has a record of those amounts and the FLSA
rule for $30 a month does not really come into play. (In today’s economics, for
someone in the tipping industry, if tip earnings are less than $20 a month, the
worker probably is in the wrong line of work.)
Federal wage and hour rules note that employees in occupations such as waiters,
bartenders, busboys, bellhops, taxicab drivers, and barbers typically meet the
criteria of customarily and regularly receiving more than $30 a month in tips.
The regulations add that where employees customarily and regularly receive the
minimum amount of tips required by FLSA, they will not lose their status as
tipped employees even though occasionally—because of sickness, vacation, or
seasonal fluctuations—they fail to receive $30 in a particular month.
Tough Issues
With the fundamentals out of the way, employers and payroll departments must
navigate several levels of administration to comply with various other federal
and state tax and wage and hour requirements for employing tipped workers.
This report outlines what is necessary to:
s comply with federal FLSA requirements;
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The differing thresholds do
not keep payroll professionals
awake at night.
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s comply with state wage and hour requirements;
s comply with federal taxation, withholding, and reporting requirements; and
s qualify for the employer FICA credit on tip amounts in excess of the minimum wage.
In addition, new developments concerning federal tax audits and educational
programs available to employers to help them comply is included. For example,
many employers in industries where tipping is customary do not realize that they
may be liable for the employer’s share of Social Security and Medicare taxes on
tips employees do not report to them.
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SECTION 2: WAGE AND HOUR ISSUES
Section 2: Wage and Hour Issues
WAGE AND HOUR TREATMENT
Regarding tipped employees, the most significant provision of the federal Fair
Labor Standards Act allows employers to pay qualified workers a minimum cash
wage of $2.13 an hour. Verifiable tipped amounts must make up for the difference between the $2.13 an hour cash payment by the employer and the federal
minimum wage of $7.25 an hour. The difference between the two rates is known
as the tip credit, which should not be confused with the FICA tax credit on
tipped amounts covered later in this report.
Guidelines for tip pooling and other arrangements, as well as calculating overtime also are provided by the federal Labor Department’s Wage and Hour Division.
In addition, FLSA coverage has its limits, and many state provisions provide for
more favorable treatment to tipped employees, and these laws and rules must be
followed. For example, certain states, such as Connecticut, may mandate a
higher cash minimum wage and a lower tip credit than required by FLSA, and
some, like Alaska, do not allow any tip credit to be taken at all. In such cases,
the state requirements would preempt the federal FLSA minimum wage and
overtime requirements. See the Appendix for charts on state laws concerning tip
minimum wage, the tip credit, and special overtime calculations.
Determining when the tip
credit can apply is tricky.
Coverage
In some instances, employees hold ‘‘dual jobs,’’ in which they ‘‘customarily and
regularly’’ receive at least $30 a month in tips performing one set of duties, but
not the other. If such dual jobs consist of distinguishable occupations, an employer must treat the worker as a tipped employee only with respect to the hours
he or she works in the ‘‘tipped’’ occupation.
Examples: Bob, a hotel maintenance worker also serves as a waiter in the hotel’s restaurant. Because receives at least $30 a month in his occupation as a
waiter and receives no tips in his maintenance position, the hotel must treat Bob
as a ‘‘dual-job’’ employee and credit tips toward his wages during the hours he
works as a waiter. On the other hand, the hotel does not have to treat tipped employees as having dual jobs simply because they perform duties that are not directed toward producing tips. For example, Elaine, a waitress who customarily
and regularly receives $30 in tips each month, spends part of her time cleaning
and setting up tables. The hotel may still credit her tips wages when she performs these nontipped duties because these duties do not comprise a separate
occupation.
In early 2012, the Supreme Court refused to review an appeals court ruling that
allowed employees who claimed they spent more than 20 percent of their working time on nontipped activities, such as cleaning restrooms and preparing and
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closing the restaurants, to pursue FLSA minimum wage violation claims against
the restaurant chain Applebee’s (Applebee’s Int’l Inc. v. Fast, U.S., No. 11-425,
cert. denied , 1/17/12).
Applebee’s had argued the Eighth Circuit’s decision deferring to the Wage and
Hour Division’s interpretation of a 20 percent threshold was ‘‘badly misguided’’
and conflicts with decisions from the Eleventh Circuit, ‘‘which emphatically rejected the 20 [percent] rule,’’ and the Sixth Circuit, which also rejected the division’s interpretation. The employees and Applebee’s have since agreed to settle
the matter without trial.
Tip Credit
Under federal law, if an employee is a ‘‘tipped employee,’’ the employer may
credit any tips received by the worker to cover up to $5.12 of that worker’s
hourly wage. A provision of the Small Business Protection Act requires employers to ensure tipped employees are paid a minimum of $7.25 an hour, of which
up to $5.12 may be paid in tips.
Employers must notify
workers about tip credit
status.
While this provision creates a cost-saving opportunity for employers to not have
to pay a full minimum wage out of their coffers, it also gives rise to an increased
administrative burden that must be undertaken in order to stay compliant and
avoid exposure to wage and hour penalties and/or lawsuits.
To take advantage of the tip credit, an employer must notify the employees of
the statutory tip credit provision and permit employees to retain all tips received.
If the tips are turned over to the employer as part of gross receipts, the credit
cannot be taken and the applicable minimum wage must be paid in full.
The tip credit must be included in a tipped employee’s regular rate of pay. Employers are prohibited from using a different tip credit during overtime hours
than they use during straight-time hours. Employers also must make up the difference in cash wages if the amount of tips received does not equal or exceed
the tip credit amount during any work week.
EXAMPLE: Brian, a waiter, is paid $2.13 an hour in cash wages, plus tips.
During one week, he works 40 hours and earns $240 in tips, or an average of $6
per hour in tip income. From Brian’s tips, the employer may apply a maximum
of $5.12 an hour toward meeting the minimum wage of $7.25 an hour. Brian’s
hourly rate ($2.13 + $5.12 = $7.25) meets the FLSA minimum. However, the
following week, because of street repairs in front of the restaurant, Brian earns
$76 in tips for 40 hours, or an average of $1.90 an hour. That, combined with
his hourly wage of $2.13, comes to $4.03 an hour. The employer must pay Brian
an additional $3.22 an hour to satisfy the minimum wage obligation ($2.13 +
$1.90 +$3.22 = $7.25).
The amount of tip credit claimed by the employer cannot exceed the amount of
tips actually received by the employee. Employees—or their authorized
representative—can request the Department of Labor’s Wage and Hour Division
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SECTION 2: WAGE AND HOUR ISSUES
to determine whether the actual amount of tips they receive is less than the
amount determined by the employer as a wage credit.
In wage actions against employers, the burden of proof is on the employer to
show that employees actually received the amount of any claimed tip credit.
The graphic below illustrates the calculation needed to determine if tips received
exceed the minimum wage:
FLSA - Tip Credit
Example #1
Rate
$
X
2.13
Employee Reported Tips
Min. Wage
$
Hours
35 =
$ 50.00 =
times
35 =
7.25
Difference owed by employer:
Example # 2
Rate
$
X
2.13
Employee Reported Tips
Min. Wage
$
Hours
35 =
$ 190.00 =
7.25
Difference owed by employer:
times
35 =
$
$
$
74.55
50.00
124.55
$
253.75
$
129.20
$
$
$
74.55
190.00
264.55
$
253.75
$
-
Employees TIPS took the total pay OVER minimum wage
In the first calculation the employee did not earn enough in tips, so the employer
had to make up the difference with the amount shown. In the second example,
the employee tips exceeded the tip credit amount and the employer did not owe
any additional wages.
Employers must be cognizant that the federal tip credit may not be applicable in
the particular state or jurisdiction where tipped employees work. Monitoring of
the various state requirements is necessary to ensure the calculation for compensation to tipped employees in those areas meets often different compliance requirements.
Tip Pooling and Sharing
While the law does not allow the use of the tip credit unless employees retain
the tips they receive, a special provision is made to allow the practice of tip
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pooling. These arrangements may operate in variety of ways. Tips can be combined and divided among all the employees on each shift, or certain
employees—for example, busboys—can share in a percentage of tips received by
waiters and waitresses. For example, if a waiter receives $400 in tips in one
month, a busboy might receive one-fourth, or $100, of the tips received that
month.
The principal characteristic of these arrangements is that a portion of the tips
given to an employee is diverted to one or more co-workers.
Several administrative issues surround tip pooling and tip sharing, and most are
in the wage and hour area.
First, the FLSA requires employers to inform employees about mandatory tip
pools. According to 2011 final Wage and Hour regulations (RIN 1215-AB13,
1235-AA00)
‘‘[C]ourts have disallowed the use of the tip credit for lack of notice even ‘where the
employee has actually received and retained base wages and tips that together amply
satisfy the minimum wage requirements,’ remarking that ‘[i]f the penalty for omitting
notice appears harsh, it is also true that notice is not difficult for the employer to provide.’ Reich v. Chez Robert Inc., 28 F.3d 401, 404 (3d Cir. 1994) (citing Martin v. Tango’s Restaurant, 969 F.2d 1319, 1323 (1st Cir. 1992)).’’
Second, the Labor Department’s Wage and Hour Division attempted to set
benchmark percentages for what tipped employees can receive in a tip-pooling
arrangement, but this has been challenged successfully in court and the Wage
and Hour Division has said it will no longer apply a percentage benchmark to tip
pooling arrangements.
Tip pooling, while popular,
has its legal and
administrative challenges.
The 2011 final regulations, however, attempt to make clear that tips are the property of the employee, and that regulations permitting employers to take control
of employee tips through agreements limit the use ‘‘of an employee’s tips—
either through a tip credit or a valid tip pool—whether or not the employer has
elected the tip credit.’’
The rule prohibits employers from using an employee’s tips for any reason other
than as a tip credit to make up the difference between the required cash wage
paid and the minimum wage or in furtherance of a valid tip pool, and declared
that tips are the employee’s property regardless of whether the employer has
taken a tip credit.
The provision in the final regulations have already faced two court challenges. In
rejecting claims from the National Restaurant Association, the U.S. District
Court for the District of Columbia said the detailed final rule ‘‘logically followed’’ from the more general language of a July 2008 notice of proposed rulemaking. The Labor Department complied with the Administrative Procedure Act
and gave proper notice to the public before it adopted a new regulation requiring
employers to inform tipped employees of the ‘‘tip credit’’ requirements (Nat’l
Rest. Ass’n v. Solis, 2012 BL 130050 (D.D.C. 2012)).
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SECTION 2: WAGE AND HOUR ISSUES
In the summer of 2012, restaurant industry representatives filed a similar lawsuit
in an Oregon federal court to prevent the Labor Department from enforcing the
tip-pooling regulations (Oregon Rest. & Lodging Ass’n v. Solis, D. Ore., No.
3:12-01261, complaint filed , 7/12/12). No determination has been made by the
court in this matter as of May 2013.
The federal tip-pooling requirements are complicated by separate state laws and
rules on tip-pooling arrangements. For example, Massachusetts barred Starbucks
Coffee Co. from including supervisors who perform tipped employee duties from
sharing in tip-pooling arrangements (Matamoros v. Starbucks Corp., 1st Cir., No
12-1189, 11/9/12). The ruling required that the company pay more than $14 million in penalties and damages, and to change its business model to offer a bonus
and higher wage rate to shift supervisors in Massachusetts who previously
shared tips with nonmanagement employees. Starbucks is facing a similar challenge in New York, but won a case in California concerning the same issue.
Tip-Back Arrangements
Similar, but distinguishable from pooling arrangements, are other arrangements,
sometimes referred to as tip-back arrangements, that require the employees to
credit or turn over tips to the employer as gross receipts for the employer.
Such amounts are not treated as tips for purposes of the FLSA, since they do not
constitute a reward for service that is retained by employees providing the service. Therefore, where such agreements are in place, employers must pay employees the full hourly minimum wage without the benefit of any tip credit.
Service Charges
When restaurants require an automatic gratuity on a customer’s bill, while customer views this as an automatic tip (as does the employee), this is considered
part of their wages. These service amounts must be added to the employee’s
gross income in the same manner as their hours times their rate of pay.
Service charges cannot be
counted as tips.
A similar distinction being made between by the Internal Revenue Service in
determining the difference between the IRS definition of service charges and
what are tips for tax purposes is covered later in this report.
Tips Charged to a Credit Card
Where tips are charged to a credit card, employers must pay the tips to the employee no later than the next regular pay day. An employer may not wait until it
is reimbursed by the credit card company. Nevertheless, the employer is not obligated to pay the amount of tips specified on the credit card slip if the amount is
uncollectable.
Therefore, the employer may recover tips that have been paid to an employee
when a credit card charge is uncollectable, unless recovering such amount would
result in the employee receiving less than the minimum wage or violate a state
law prohibiting such pay deductions.
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When recovering such overpaid tips—whether by payroll deduction or by out-ofpocket reimbursement by the employee—the employer should thoroughly document the recovery steps.
FLSA Recordkeeping Requirements
An employer can count, up to a legal limit, tips received by employees as part of
the minimum wage. In addition to the information ordinarily applicable to covered employees, employers that elect to use the tip-credit rule must first inform
the affected workers:
s the cash wage (at least $2.13 an hour) that will be paid;
s the amount used as a credit toward the minimum wage, not to exceed $5.12
an hour;
s that the amount employers claim cannot be greater than the than the tips received;
s that all tips are to be retained by the employees except for valid tip-pooling
arrangements; and
s that written reports will be given to those affected each time the per-hour tip
credit amount changes from one week to another.
Documentation is key to
staying compliant.
In final regulations on the tip credit, the Labor Department said while there is no
requirement to provide such notification in writing, it nevertheless will be necessary to document that appropriate notification about the tip credit was given.
Employers must record, in addition to the information ordinarily required, the
following information:
s a letter or symbol on the pay records of employees whose wages are determined in part by tips;
s weekly or monthly amount of tips reported to the employer by the employee
(this may consist of reports made by the employees on IRS Form 4070, Employee’s Report of Tips to Employer);
s amount of tips credited toward each employee’s wages;
s hours worked each workday that the employee does not receive tips, and the
total daily or weekly straight-time payment for such hours; and
s hours worked each workday in which the employee receives tips and the total
daily or weekly straight-time earnings for such hours.
Records relating to tipped employees must be retained for a minimum of two
years.
Overtime
When a tipped employee works overtime, the calculations are slightly different
than a typical FLSA regular rate of pay calculation. The employees tips are used
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SECTION 2: WAGE AND HOUR ISSUES
to calculate the regular rate of pay, but are only used to the point the maximum
tip credit is reached. Any tips that exceed the tip credit are not used in the calculation.
Where the employer takes the tip credit, overtime is calculated on the full minimum wage, not the lower direct, or cash, wage payment. The employer may not
take a larger tip credit for an overtime hour than for a straight time hour. For
any overtime hours worked the maximum tip credit is $5.12. The formula for
each overtime hour is $7.25 x 1.5 - $5.12, or $5.76.
See the Appendix for state-by state overtime calculations for tipped workers,
which can vary from the federal calculation and will preempt the federal amount
if the result favors the employee.
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SECTION 3: TAX TREATMENT
Section 3: Tax Treatment
TAX TREATMENT OF TIPS
As explained in the introduction to this report, while all money received by a
taxpayer should be reported, for IRS purposes the employee only is required to
report all tips to the employer if the amount of the tips equals or exceeds $20 a
month.
When an employee reports their tips, those tips are fully taxable for:
s the Medicare (Health Insurance) portion of the Federal Insurance Contributions Act—(both employee and employer);
s Social Security tax—(up to the wage base limit of $113,700 for 2013, both
employee and employer);
s federal income tax;
s local income taxes based on local laws;
s state unemployment; and
s the Federal Unemployment Tax Act;
With regard to tax withholding, the common problem in the payroll tipping industry is since the employee already has the tips and is just reporting them to the
employer, the payroll calculation may come up short from time to time—or every time—for the withholding taxes. Because the employer does not receive the
tip amounts and these dollars are only reported to the employer, there may not
be enough net pay from the base pay to pay all the taxes.
When wages are insufficient to meet the employment tax obligations and the
employee does not make additional funds available to pay the taxes, the employer first must determine the amount of taxes due on the regular wage portion.
To calculate the remaining tax liability, the regular wage amount and the reported tip amount should be combined. The difference between the amount to be
withheld from the total wages and tips and the amount figured for regular wages
is the remaining employment tax liability.
All taxes must first be withheld on the regular wage portion and then the remaining liability for the tip portion in the following order of priority:
s employee share of FICA due on the regular wage payment;
s federal income tax withholding on the regular wage payment;
s all other taxes due on regular wages;
s employee share of FICA due on reported tips (or estimated tip income);
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Withholding taxes for tips
means dipping far into cash
wages.
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s federal income tax withholding on reported tips (or estimated tip income);
then
s all other taxes due on reported tips.
Uncollected income taxes on tips should be withheld from the next wage payment, if sufficient funds are available.
Because of this situation, it is important for the payroll calculation to withhold
the taxes in the correct order. The order listed above is how the taxes are to be
withheld. Here is an example of a normal calculation with ample pay to withhold all the tax:
Tax Calculation on Tips
Hours
40
Rate $ 5.00
Gross Pay
$ 200.00
Tips
Total Taxable
$ 100.00
$ 300.00
Gross Pay
Fed Inc Tx
SS Tx
MED Tx
State Tx
$ 200.00
$ 30.00
$ 18.60
$ 4.35
$ 90.00
Net Pay
$ 57.05
Taxable Wage
$ 300.00
$ 300.00
$ 300.00
$ 300.00
As you can
see, there is
sufficient
net pay
Note: The taxes are calculated on the $300, which includes the tips, but the employer is not actually ‘‘paying’’ the tips because the employee already received
them. From a gross-to-net standpoint the employee’s gross pay is $200.
In the following two graphics, after calculating all the taxes on the taxable
amount of $450, there was not enough pay to collect all the tax.
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SECTION 3: TAX TREATMENT
Tax Calculation on Tips
Hours
40
Rate $ 5.00
Gross Pay
$ 200.00
Tips
Total Taxable
$ 250.00
$ 450.00
Gross Pay
Fed Inc Tx
SS Tx
MED Tx
State Tx
$ 200.00
$ 45.00
$ 27.90
$ 6.53
$ 135.00
Net Pay
$ (14.43)
Taxable Wage
$ 450.00
$ 450.00
$ 450.00
$ 450.00
With having higher
tips, there is not
enough net pay.
Tax Calculation on Tips
Hours
40
Rate $ 5.00
Gross Pay
$ 200.00
Tips
Total Taxable
$ 250.00
$ 450.00
Gross Pay
Fed Inc Tx
SS Tx
MED Tx
State Tx
$ 200.00
$ 45.00
$ 27.90
$ 6.53
$ 120.57
Net Pay
$
Taxable Wage
$ 450.00
$ 450.00
$ 450.00
$ 450.00
‐
Only able to withhold $120.57
instead of $135 in prior example.
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In a nongraphic example, Alex works 10 hours one week at $2.13 an hour for a
total of $21.30 in regular wages. He also reports tips of $300 for that week. His
total taxable wages and tips are $321.30. The regular wages do not cover the
entire tax liability, and Alex does not provide his employer with money to cover
the total tax liability.
The employer first must take the regular wage amount ($21.30) and withhold the
total 7.65 percent for the Medicare and OASDI portions of FICA ($1.63). Next
the employer calculates the federal income tax withholding amount on $21.30
(this depends on the number of federal exemptions claimed) and any state or
local taxes due on those regular wages and withholds those amounts.
The employer then determines the total tax liability on $321.30 for FICA
($24.58), federal income tax, and any state or local taxes. Subtracting the
amounts already withheld from regular wages, the total FICA tax remaining is
$22.95.
Insufficient regular wages to
cover taxes triggers complex
calculations.
The remaining liability for federal income tax and other taxes due for the tip
income can be determined in the same manner, and withheld upon according to
the priority listed above.
Employers, while responsible for withholding the proper amount of tax for regular wages, cannot be held liable for employee reported tips if the amount of
regular wages (and any amount the employee gives the employer) is insufficient
to cover the entire federal tax liability. In such cases, the employee is held personally liable for uncollected taxes on tips. Therefore, the separation of regular
and tip income for figuring taxes is necessary.
However, because federal income taxes and many state income taxes are withheld on a graduated scale, those amounts need to be combined again to accurately figure the total withholding tax liability. Separately figuring FIT withholding first on regular wages and then on tip income could result in understating the
total federal income tax liability.
Note that state or local taxes due on regular wages are withheld before any taxes
on reported tips are withheld. Regular wages are separated from the tip portion
to determine liability only when there are not enough wages to cover the entire
tax liability. If after all taxes are withheld there are insufficient funds to meet
state disability insurance or other withholding obligations, there is no legally
established order of priority covering which taxes must be withheld first.
Often, however, local jurisdictions and state disability laws require the employer
itself to pay any tax it fails to withhold. On the other hand, states generally do
not impose such a penalty for failure to withhold state income tax. Instead, the
state simply collects the tax due directly from the employee. The employer
should consult the appropriate state and local rules to determine a withholding
priority.
If wages are insufficient to cover the amount of withholding, the employer
should inform employees of the amount of the deficiency. Employees may pay
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the employer to meet their income tax withholding and FICA obligations. The
employer is required to accept and deposit these funds and include them in the
quarterly return.
However, should the employee not provide additional funds by the 10th of the
month following the month tips are reported by the employee, the employer’s
obligation to collect the taxes on reported tips ceases. Employees who do not
make funds available to meet excess withholding requirements may have to pay
estimated income taxes.
They also must pay any unpaid FICA taxes on tip income of $20 a month or
more when they file their annual tax returns. Note, too, that the employer’s obligation to withhold the employee’s share of FICA stops when the wage base has
been reached, even if the employee has not paid all of the FICA tax owed up to
that point.
Tax Reporting
Tipped employees are required to report to their employers the amount of the
tips they receive in any month in which they receive more than $20. Internal
Revenue Service Form 4070, Employee’s Report of Tips to Employer, is used
for this purpose.
Employees must provide a completed Form 4070 to their employer no later than
the tenth day of the month following the month for which tips are reported. If
the tenth day is a Saturday, Sunday, or legal holiday, employees have until the
next day that is not a Saturday, Sunday, or legal holiday to file.
Employees must include all tips—including tips not reported to the
employer—as gross income on their income tax returns. Moreover, employees
are responsible for keeping sufficient proof of the tips they receive during a tax
year.
Form 4070-A, Employee’s Daily Record of Tips, may be used for this purpose.
Employees must show the total amounts of cash and charge tips received directly
from customers and from other employees, along with the amounts the employee
paid out to other employees in cases where the employee participates in a tip
sharing or pooling arrangement. Form 4070-A provides spaces for such amounts
as well as spaces for the names of the employees to which tips were paid out.
If employees do not keep a daily record of tips, other proof of tip income must
be kept, such as copies of restaurant bills or credit card charges that show the
customer’s tip. Employees who fail to report tips as required are liable for a penalty equal to 50 percent of the taxes due on their tip income, unless there was
reasonable cause for not reporting the amounts.
For employers, while tips are taxable for federal income tax and Social Security/
Medicare purposes they are reported differently on a quarterly basis on IRS
Forms 941 and the annual Form W-2.
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Employees are required to
provide employers with Form
4070.
Payroll Strategic Whitepapers
Note that employers subject to tip allocation requirements have to file Form
8027, Employer’s Annual Information Return of Tip Income and Allocated Tips,
covered in the next section of this report.
For federal income tax purposes, the tips are included in line 1 of the Form 941
and Box 1 of Form W-2. Both the lines/boxes state ‘‘Wages, Tips, and Other
Compensation.’’ Also for Medicare, the tips are included on line 5 of Form 941
and Box 5 of Form W-2. The tips are reported separately for Social Security on
line 5b on Form 941 and Box 7 of Form W-2.
Tax and Reporting Failures
Separate rules apply to the employer and the employee to determine how taxes
are paid on tips when an employee fails to report tips to the employer.
The employer is not liable for unreported tips unless an Internal Revenue Code
Section 3121(q) notice and demand (Letter 4520) for the taxes is made to the
employer by IRS. Then the employer is only liable for the employer share of
FICA tax owed.
Employer FICA liability for
unreported tips starts with an
IRS notice and demand.
In advance of the formal issuance of a notice and demand, the IRS sends a prenotice (Letter 4520- P). The letter gives the employer the opportunity to dispute
the information provided. The pre-notice has contact information for the Employment Tax Operations designated staff to resolve discrepancies raised by the
employer. The letter is not the formal Section 3121(q) notice and demand.
The employee is only liable for the employee share of FICA tax owed and pays
by completing Form 4137, Social Security Tax on Unreported Tip Income, and
filing it with the individual tax return on Form 1040.
The Section 3121(q) notice and demand must be written to the employer stating
the amount of tips received by the employee who failed to report or underreported tips. Although no form or procedure is prescribed, a notice-and-demand
document:
s includes the words ‘‘notice and demand’’ and ‘‘Section 3121(q);’’
s states the amount of tips received by the employee (or employees); and
s states the period to which the tips relate.
If the document includes the above but states that it is not a notice and demand
then it is not a notice and demand.
The employer must deposit tax due on the unreported tips after receiving notice
and demand. Under the deposit rules, the employer FICA tax on tips received by
the employee, as shown on the Section 3121(q) notice and demand, is treated as
employment taxes accumulated by the employer on the date of the Section
3121(q) notice and demand.
Depending on the amount due, an employer may be able to remit the payment
with the Form 941, but the Form instructions should serve as a guide. To avoid
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any possible deposit penalty, if the amount due for the section 3121(q) tax liability as well as other taxes for the quarter exceed the dollar limitation for remittance with a filed return, an employer should make a deposit according to the
deposit rules.
Employers using a payroll service providers should notify them immediately
after receiving the notice and demand so proper arrangements can be made for
reporting and payment.
Any errors discovered on a previously filed Form 941 related to tips subject to
additional Medicare tax withholding must be corrected on Form 941-X, line 11.
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Payroll Strategic Whitepapers
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SECTION 4: ALLOCATIONS AND AUDITS
Section 4: Allocations and Audits
TIP ALLOCATIONS AND AUDITS
For tax purposes, special tip-allocation rules apply for food and beverage establishments with at least 10 employees. If the tipped employees report a low level
of tip income, the food and beverage employers are required to allocate amounts
to be considered tips on Forms W-2. While employees subject to these special
rules may owe additional income and FICA taxes on tips allocated to them, employers that allocate tips should not withhold taxes on the allocated amounts.
(See Allocation Coverage Requirements, later in this section.)
Reporting Requirements
A key part of the tip allocation requires employers to report additional information to the IRS concerning receipts from food and beverage operations and their
employees’ tip income.
Employers subject to the reporting requirements under the tip allocation rules
must submit IRS Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips. The form must be filed by the end of February (April
1 if filing electronically) following the year being reported and should be sent to
the Department of the Treasury, Internal Revenue Service, Cincinnati, Ohio
45999.
Employers filing 250 or more Forms 8027 must file electronically. A separate
report for each food and beverage operation must include the following information:
s the employer’s name, address, and employer identification number;
s the establishment’s name, address, and the five-digit number employer given
to identify individual establishments under the same Employer Identification
Number;
s total gross receipts from food and beverage sales, excluding carryout, state
and local taxes, and sales covered by a service charge of at least 10 percent);
s total amount of charge receipts on which customers showed tips, excluding
the same items as above);
s total amount of tips reported by employees;
s total amount of service charges of less than 10 percent collected from customers and paid to employees as wages; and
s name and Social Security number of each employee to whom tips were allocated and the amount allocated to each one.
Underfiling of Form 8027?
In mid-2010, Daniel R. Lauer, program manager for the IRS National Tip Compliance Program, said the agency annually receives 50,000 to 60,000 copies of
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Employers are required to
apply additional tip amounts
to employee W-2s in certain
circumstances.
Payroll Strategic Whitepapers
Form 8027, Employer’s Annual Information Return of Tip Income and Allocated
Tips. He said, however, that there is a ‘‘significant nonfiler population’’ in the
food and beverage industry. ‘‘Our information shows that we should be receiving
150,000 to 200,000’’ forms, Lauer said during a conference call May 6, 2010,
with payroll professionals.
Calculating the Allocation
If employees of an establishment report tips totalling less than 8 percent of total
sales, additional tip income must be allocated to employees who receive tips
directly from customers.
Food and beverage sales during an allocation period are totalled. Do not include
carryout sales, state or local taxes, or sales on which there was a service charge
of at least 10 percent.
An allocation period can be a regular payroll period, a year, or a reasonable division of a year, such as a calendar month. Determine 8 percent of this total.
Methods for allocating
amounts can vary and still be
compliant.
Compare this figure with the amount of tips reported by all employees during the
allocation period. If the reported tips are less, the difference must be apportioned
as tip income among those employees who receive tips directly from customers
(or among all tipped employees, if you have an agreement with your employees
requiring this). However, no tip income should be allocated to an employee who
reports tips at least equal to the employee’s prorated share of 8 percent of total
sales.
Tips may be allocated according to any formula agreed to by both the employer
and employees. The agreement must be in writing and have the consent of at
least two-thirds of each category of tipped employees, such as waiters and waitresses, bartenders, busboys, and maitre d’s employed at the time. The agreement
also must be subject to revocation if so indicated in writing by at least two-thirds
of the employees in affected categories.
If an allocation formula cannot be agreed upon, the IRS provides an allocation
formula that must be used. The IRS formula permits allocation based on each
directly tipped employee’s share of either gross receipts or total hours worked.
However, allocation based on share of total hours may be used only by establishments having fewer than the equivalent of 25 full-time employees during a payroll period (i.e., the average number of employee hours worked each business
day is less than 200).
Reduced Allocation
If customers normally tip less than 8 percent on average, the employer or a majority of employees may apply to IRS to have the percentage used in the allocation reduced from 8 percent.
Applications must be made in writing to the district director for the establishment’s location, and must contain sufficient information to allow the district di-
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rector to determine a reasonably accurate tip rate. The application must include a
representative menu for each meal served at the establishment and copies of the
employer’s Information Return of Tip Income (Form 8027) for the three preceding calendar years.
A reduced rate approved by IRS will not be less than 2 percent. It will be effective only for a specified period of time, after which the 8 percent rate will apply,
unless an extension to the original term has been granted.
An employer may submit a single application for a reduced allocation rate for
two or more of its establishments of essentially the same nature, provided the tip
rates at each establishment are basically the same and they are located in the
same IRS region. A multi-establishment application should be submitted to the
district director for the IRS district where most of the establishments are located.
If an employee leaves before the end of the calendar year and requests an early
Form W-2, allocated tips do not have to be reported on the form. However, employers may include on the early Form W-2 the employee’s actual tip allocation,
if the amount is known, or a good-faith estimate of the allocation amount. If an
estimate is used, the word ‘‘estimated’’ should be placed next to the allocated
amount.
If no allocation was shown on the early Form W-2, or if the estimated allocation
varies from the actual amount by more than 5 percent, the employer must give
the former worker a Form W-2c, ‘‘Statement of Corrected Income and Tax
Amounts,’’ during January following the year that the employee terminated.
If an employer allocates tips under one of the methods described above, the employer is not liable to any employee if any amount is allocated improperly. However, if the allocation shown on an employee’s Form W-2 varies from the correct
allocation by more than 5 percent, the employer must adjust the worker’s allocation and review the allocable amount of all other employees to ensure that the
error did not distort any other employee’s share by more than 5 percent.
The employer must use Form W-2c to report the corrected allocation. Employees
must report as income on their annual income tax return the amount of allocated
tips shown on Form W-2, unless they can show that they received a lesser
amount.
Allocated tips are not reportable on Form 941, Employer’s Quarterly Federal Tax
Return, as they are not subject to withholding for federal income taxes or FICA,
unless there is a connection made using Form 4137 as covered below.
Form 4137 and Employer Taxes
If an employee must include allocated tips in income, the worker must use Form
4137, Computation of Social Security Tax on Unreported Tip Income, to figure
the Social Security tax on such amounts.
A recent IRS compliance program assesses the employer’s share of FICA taxes
on tips reported on Form 4137. This form is used by employees who receive
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Employers must use Form
W-2c to report corrected
allocated amounts.
Payroll Strategic Whitepapers
Allocation Coverage Requirements
Most large food and/or beverage establishments are required to report
additional information to the IRS concerning receipts from food and beverage operations and their employees’ tip income. The information reporting requirement applies to U.S. operations that provide food and
beverage for on-premises consumption, that normally employed more
than 10 people on a typical business day during the preceding year, and
where tipping is customary.
Establishments where tipping is not customary, such as cafeterias or fastfood operations, and those that add a service charge of at least 10 percent to 95 percent of food and beverage sales are not subject to these
rules. However, operations that are part of a larger establishment, such as
a hotel coffee shop, are subject if they employ more than 10 people.
More than 10 employees: An employer is considered to have more than
10 employees on a typical business day if the average of the number of
hours worked by all employees in food and beverage operations is more
than 80, treating all members of a group of businesses under common
control as one employer. To compute this average, an employer uses the
month in which it had the greatest gross receipts and the month with the
least gross receipts in the preceding calendar year. Excluded from these
calculations are any month in which the employer was not open for business and any hours worked by an individual who owns at least half of
the stock of an incorporated business. If the average number of employee hours worked per business day during any month in the preceding year was more than 80, the employer is considered to have more
than 10 employees, regardless of the average during any other months.
New business: If a business was in operation for less than one month in
the preceding year, it is considered to meet the more-than-10-employees
standard if, during any two consecutive calendar months in the current
year, the average number of hours worked per business day by all employees was more than 80. The reporting rules apply to a new business
with the first payroll period following the two consecutive months.
cash and charged tips of more than $20 a month but do not report them to employers.
Employees who have been allocated tips also use Form 4137, but employers
generally have only been liable for their portion of payroll taxes on tips when
employees report those tips to them. This has changed.
IRS can assess employers additional FICA tax liability now that it revised Form
4137 in 2008 to require employees to list the employer identification number on
the form so it can aggregate all forms. The audits involve IRS contacting em-
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SECTION 4: ALLOCATIONS AND AUDITS
ployers when it finds a discrepancy between an employee’s Form 4137 and the
business’s Form 941, Employer’s Quarterly Federal Tax Return.
The service will notify employers of the amount owed and ask that the taxes be
included on their next Form 941 using line 5f, Section 3121(q) Notice and
Demand—Tax due on unreported tips. Employers will not be subject to interest
or penalties if they are compliant.
More information on resolving the notice and demand issue is contained in the
previous section of this report.
McQuatters Formula: Assessment Estimates
IRS may assess employment taxes against an employer based on an aggregate
estimate of indirectly-tipped employees, known as the McQuatters Formula. Under Section 3121(q), an employer can be assessed its share of FICA taxes even
when the individual employee’s share is not determined.
To compute the amount of unpaid FICA, IRS first estimates the yearly sales of
each server, and then multiplies that amount by an average tip rate to determine
the yearly tip income of each server. This formula, is a procedure approved by
the U.S. Tax Court in 1973 for estimating a restaurant waiter’s tip income.
The formula, which was first used in the late 1990s, survived several federal
appeals court challenges (Morrison Restaurants v. United States in 1997, Bubble
Room v. United States in 1998, and Quietwater Entertainment, Inc. v. United
States in 2000) before generally being upheld by the Supreme Court in 2002
(United States v. Fior D’Italia Inc., U.S., No. 01-463, 6/17/02).
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Payroll Strategic Whitepapers
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SECTION 5: FICA TAX CREDIT
Section 5: FICA Tax Credit
FICA BUSINESS CREDIT ON TIPS
A business tax credit exists for food and beverage establishments that equals the
employer’s Federal Insurance Contributions Act tax obligation (7.65 percent) for
tips reported by employees in excess of those treated as wages for purposes of
satisfying the minimum wage provisions of Fair Labor Standards Act. (A food or
beverage establishment is any business that provides food or beverages for consumption on the premises and where gratuities given to servers is customary.
This credit, under Internal Revenue Code Section 45 B, was expanded to include
tips received in connection with delivery outside the premises of the establishment beyond the minimum wage.
Employers claim a credit for Social Security and Medicare taxes paid or incurred
by the employer on certain employees’ tips using Form 8846, Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips. The
credit is part of the general business credit.
According to the form’s instructions, the credit is equal to the amount of employer Social Security and Medicare taxes paid or incurred by the employer on
tips received by the employee. However, the amount of tips for any month that
are used to figure the credit must be reduced by the amount by which the wages
that would have been payable during that month at $5.15 an hour exceed the
wages (excluding tips) paid by the employer during that month.
The form provides the following example:
For example, an employee worked 100 hours and received $450 in tips for October
2012. The worker received $375 in wages (excluding tips) at the rate of $3.75 an hour.
If the employee had been paid $5.15 an hour, the employee would have received wages,
excluding tips, of $515. For credit purposes, the $450 in tips is reduced by $140 (the
difference between $515 and $375), and only $310 of the employee’s tips for October
2012 is taken into account.
The two calculation examples that follow show first how the credit is calculated
for an employee that works exclusively as a tipped employee, and then an employee working two different jobs for the same employee:
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The business tax credit was
expanded to include tips
related to product deliveries.
Payroll Strategic Whitepapers
Employer Business Credit on Tips
Rate
$
2.13
X
Employee-Reported Tips
Min. Wage
$
Hours
35 =
$ 200.00 =
$
$
$
x35 = $
5.15
74.55
200.00
274.55
180.25
TIPS that exceeded min. wage
$
Employee's Tips took the total pay OVER min. wage
94.30
Note: Even though 2013 FLSA min. wage is $7.25 an hour, for
for this credit, a $5.15 an hour rate still is used.
The employer would have paid FICA on the entire $274.55.
However, $94.30 of the tips were over the $5.15 min. wage.
The employer will receive a credit on FICA match on
their business tax return based on the $94.30 tip wages.
$
94.30
Business Credit on Tips
x
7.65% = $
7.21
Employer Business Credit on Tips and
Second Job That Is Not Tips
Rate
$
7.25
X
Tipped Wages
$
2.13
X
Employee-Reported Tips
Min. Wage
$
5.15
Hours
15 =
$
108.75
25 = $
$ 200.00 = $
$
x25
$
53.25
200.00
253.25
28.75
Tips that exceeded min. wage
$
124.50
Employee's tips took the total (of just the tipped wages portion)
pay OVER min. wage
Note: Even though 2013 FLSA min. wage is $7.25 an hour, for
for this credit, the $5.15 an hour rate is used.
The employer would have paid FICA on the entire $253.25 of
tipped wages and tips
However, $124.50 of the tips were over the $5.15 min. wage.
The employer will receive a credit on FICA match on
their business tax return based on the $124.50 tip wages.
$
32
124.50
Business Credit on Tips
x
7.65% = $
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Beauty Salons Vie for Credit Action
The beauty salon industry wants Congress to change federal tax law to compensate shops and salons for the Social Security taxes they pay on tips, similar to
relief that has been available to restaurants.
Salons never see the tips customers pay stylists, but the shops still have to pay
Social Security taxes on the gratuities. Salons trial only restaurants in the amount
of tips collected, according to the Professional Beauty Association, which says it
represents 8,000 salons and stylists.
Salons that employ stylists, as opposed to renting out space to independent stylists, generally count on employees to accurately report cash tips, which are noted
as withholding on Forms W-2, Steve Sleeper, executive director of the association, said in a March 2013 letter to Congress.
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Cash tips at salons are
reported on Forms W-2.
Payroll Strategic Whitepapers
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SECTION 6: IRS TIP PROGRAMS
Section 6: IRS Tip Programs
IRS TIP AGREEMENT PROGRAMS
Several agreements exist between certain industries and the Internal Revenue
Service to establish tip rates for tipped employees in specific occupational categories. The objective of the program is to improve and ensure compliance by
employers and employees with statutory provisions relating to tip income.
In cooperation with the food and beverage industry, IRS has developed a Tip
Rate Determination/Education Program to help employers address the difficulties
associated with tip income reporting. The program primarily consists of two voluntary agreements. Under this program, employers may choose either to work
with IRS to determine an established tip reporting rate, or enter into a contractual arrangement known as the Tip Reporting Alternative Commitment, whereby
employers commit to educating their employees about tip compliance and require regular statements of accountability from them.
The cooperative agreements that have been set up by IRS include:
IRS has several tip
agreements and rates for
various industries.
s Tip Reporting Alternative Commitment (TRAC) for the food and beverage
industry;
s Tip Reporting Alternative Commitment (TRAC) for the cosmetology and barber industries;
s Tip Reporting Alternative Commitment (TRAC) for use by all other industries
where tipped employees receive both cash and charged tips;
s Tip Rate Determination Agreement (TRDA) for use by employers in the food
and beverage industry;
s Tip Rate Determination Agreement (TRDA) for use by all other industries
with tipped employees other than in the food and beverage industry and the
gaming industry;
s Gaming Industry Tip Compliance Program - Revenue Procedure 2007-32; and
s EmTRAC—Employer-designed Tip Reporting Alternative Commitment (food
and beverage industry designing their own tip compliance program in conjunction with the IRS).
Short summaries of the arrangements follow. A 2010 Payroll Strategic White
Paper reviews the various arrangements in detail. A program covered in the 2010
document, the Attributed Tip Income Program, or ATIP, no longer exists.
TRDA Arrangements
Under the TRDA, certain criteria must be met for an employer to participate.
This program allows an employer to work with IRS to determine a tip rate to
which it can agree. The tip rate is based on a six-month period.
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Payroll Strategic Whitepapers
To qualify, the employer must get 75 percent of the tipped employees to sign a
Tipped Employee Participation Agreement and report tips at or above the predetermined rate, and report on workers that do not sign the TEPA.
In return, there is no specific education requirement and the TRDA assures the
employer that prior periods will not be examined as long as participants comply
with the agreement’s requirements.
There are some minor industry-specific differences between TRDA types. For
example, the food or beverage industry agreement contains a provision requiring
that, for each establishment that is a ‘‘large food or beverage establishment,’’ the
employer is to comply with the requirements for filing Form 8027, Employer’s
Annual Information Return of Tip Income and Allocated Tips, and send an additional copy of each Form 8027 to IRS.
Determining tip rates are
based on a six-month period.
The requirement for separate reporting for each large food or beverage establishment is not relevant for employers outside the food or beverage industry. Similarly, the Gaming Industry Tip Compliance Agreements (GITCAs) contain provisions specific to the gaming industry. Additionally, the GITCA employee participation threshold is negotiated and may be less than 75 percent.
TRAC Arrangements
Generally, under a TRAC, no tip rate is agreed upon, as in the case of the
TRDA, and employees are not asked to sign an agreement between themselves
and the employer. Unlike TRDA, TRAC has no validation period, so there is no
notice and demand for the employer’s portion of FICA taxes is appropriate.
The TRAC program requires training of existing and newly-hired employees on
tips and tip reporting procedures. All tipped employees are covered.
Some differences between the three TRAC agreements include, for example, the
food or beverage industry form specifies references to publications to the food or
beverage industry, while the ‘‘other’’ industry agreement references general publications.
The cosmetology and barber industries agreement contains employer responsibilities related to booth renters and independent contractors, particularly with
regard to education concerning tip reporting.
Employer-Designed Tip Reporting Commitment
The program is similar to TRAC with regard to training programs concerning the
employee’s legal obligation to report all cash and charged tips to their employer,
as well as the tip reporting procedures that provide for a written or electronic
statement (at least monthly) reflecting all tips for services attributable to each
employee.
Employers must agree to certain special recordkeeping requirements as well. The
IRS can end an EmTRAC program if an employer fails to comply with the
agreement.
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RESOURCES
Resources
RESOURCES
BNA’s Payroll Library (Subscription Service), ‘‘Taxes on Tips,’’ ‘‘FLSA Minimum Wage Rules,’’ Minimum Wage and Overtime State Summaries
(http://hr.bna.com).
Fair Labor Standards Act 29 U.S.C. § 203(t)
Internal Revenue Code § § 3121(q) and 6053 (in BNA’s Payroll Library).
Wage and Hour Regulations 29 CFR § § 531.50, 531.55, 531.56, 531.59 (in
BNA’s Payroll Library).
Treasury Regulations § § 31.3121(a)(12)-1, 31.3401(f)-1 (in BNA’s Payroll Library).
‘‘Topic 761: Tips—Withholding and Reporting,’’ IRS Tax Topics (on IRS website)
‘‘Market Segment Understandings (MSU)’’ (on IRS website)
Fact Sheet No. 15, Tipped Employees Under the Fair Labor Standards Act
(FLSA), Wage and Hour Division, Labor Department (on Labor Department
website).
‘‘New IRS Program Uses Data from Employees’ Forms 4137 to Determine the
Social Security and Medicare Taxes Owed by the Employers of Tipped Employees,’’ IRS Headliner Volume 298, May 25, 2010.
Internal Revenue Service Publication 531 (2012), Reporting Tip Income (on IRS
website).
IRS Publication 5080, Form 4137 Compliance Program (on IRS website).
IRS Revenue Ruling 2012-18, (http://www.irs.gov/pub/irs-drop/rr-12-18.pdf).
IRS Revenue Procedure 2007-32,
(http://www.irs.gov/pub/irs-drop/rp-07-32.pdf).
IRS Revenue Procedure 2006-30,
(http://www.irs.gov/pub/irs-drop/rp-06-30.pdf).
IRS Revenue Procedure 2003-35,
(http://www.irs.gov/pub/irs-drop/rp-03-35.pdf).
IRS Notice 2001-1,
(http://www.irs.gov/pub/irs-drop/n-01-1.pdf).
‘‘Beauty Salons Seek Tax Break Used by Restaurant Industry,’’ Payroll Administration Guide Newsletter, June 5, 2013. (in BNA’s Payroll Library).
COPYRIGHT
2013 BY THE BUREAU OF NATIONAL AFFAIRS, INC.,
37
Payroll Strategic Whitepapers
‘‘State Highlights, Massachusetts’’ Payroll Administration Guide Newsletter, Jan.
30, 2013.
‘‘Employer’s Policy on Tip-Sharing Violates State Law, Court Rules’’ Payroll
Administration Guide Newsletter, Jan. 2, 2013.
‘‘Appeals Court Certifies Tip-Pool Questions to State’s High Court’’ Payroll Administration Guide Newsletter, Nov. 7, 2012.
‘‘IRS Auditors to Take Closer Look at Gratuities at Restaurants, Other Industries,
Official Says,’’ Payroll Administration Guide Newsletter, Aug. 15, 2012.
‘‘Restaurant Industry Sues to Prevent Tip-Pooling Rules,’’ Payroll Administration
Guide Newsletter, Aug. 1, 2012.
‘‘IRS Issues Taxation Guidance Related to Tipped Employees,’’ Payroll Administration Guide Newsletter, July 4, 2012.
‘‘Federal Court Upholds Labor Department Tip Credit Rule,’’ Payroll Administration Guide Newsletter, June 6, 2012.
‘‘Large Employers Face High-Dollar FLSA Class Action Lawsuits,’’ Payroll Administration Guide Newsletter, March 14, 2012.
‘‘IRS Plans to End Voluntary Attributed Tip Income Program,’’ Payroll Administration Guide Newsletter, Aug. 17, 2011.
‘‘Navigating the Requirements for Filing IRS Form 8027,’’ Payroll Administration Guide Newsletter, Aug. 3, 2011.
‘‘Tipped ‘Dual’ Employees Can Sue for Back Wages,’’ Payroll Administration
Guide Newsletter, May 11, 2011.
‘‘IRS Warns of Reporting Dodge on Payments for ‘Tips’,’’ Payroll Administration Guide Newsletter, Dec. 22, 2010.
‘‘Tip Reporting Agreements Available to Employers,’’ Patrick Haggerty, IOMA’s
Payroll Practitioner’s Monthly, November 2010 (IOMA is a subsidiary of BNA).
‘‘Food, Beverage Industry Understates Employee Tip Income, IRS Official
Says,’’ Payroll Administration Guide Newsletter, May 12, 2010.
‘‘IRS Assesses Employer Share of FICA Taxes for Employee-Reported Tips on
Form 4137,’’ Payroll Administration Guide Newsletter, March 17, 2010.
‘‘Court Refuses to Review Ruling Overturning Award,’’ Payroll Administration
Guide Newsletter, Sept. 30 , 2009.
38
COPYRIGHT
2013 BY THE BUREAU OF NATIONAL AFFAIRS, INC.,
APPENDIX: STATE CHARTS
Appendix: State Charts
APPENDIX: STATE REQUIREMENTS FOR TIPPED EMPLOYEES
Minimum Wage: Rates and Credits
Tipped Employees
Based
Credit
on
Hourly
for
Minimum Future Hourly MinimumMaximum
Credit Meals/
Cash
Minimum
Wage
Lodging
of:
Wage
Wage Rate
Rate
Federal
Alabama
Alaska
Arizona
Arkansas
California
Colorado
$7.25
Connecticut
Delaware
District of
Columbia
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
$8.25
$7.25
$7.75
$7.80
$6.25
$8.00
$7.78
Minnesota
Mississippi
Missouri
Montana
COPYRIGHT
$8.25
$7.79
$5.15
$7.25
$7.25
$8.25
$7.25
$7.25
$7.25
$7.25
$7.50
$7.25
$8.00
$7.40
$6.15
(Exceptions
Apply)
$7.35
$7.80
(Exceptions
Apply)
None
$2.13
$5.12
No State-Mandated Minimum Wage
None
$7.75
None
None
$4.80
$3.00
None
$2.63
$3.62
None
$8.00
None
None
$4.76
$3.02
$2.56
$5.69
(Exceptions (Exceptions
$8.70 (eff.
Apply)
Apply)
1/1/14)
None
$2.23
$5.02
None
$2.77
None
$4.77
None
None
None
$7.00
None
$3.35
None
$4.95
None
$2.13
None
$4.35
None
$2.13
None
$2.13
No State-Mandated Minimum
None
$3.75
None
$3.63
None
$2.63
None
$2.65
$5.48
$3.02
None
$0.25
$3.90
$3.30
$5.12
$2.90
$5.12
$5.12
Wage
$3.75
$3.62
$5.37
$4.75
None
$6.15
None
No State-Mandated Minimum Wage
None
$3.675
$3.675
None
2013 BY THE BUREAU OF NATIONAL AFFAIRS, INC.,
$7.80
None
Yes
None
Yes
Yes
Yes
Yes
Yes
None
Yes
None
None
Yes
Yes
Yes
None
Yes
None
None
Yes
Yes
Yes
None
Yes
Yes
Yes
39
Payroll Strategic Whitepapers
Minimum Wage: Rates and Credits
− Continued
Tipped Employees
Based
Credit
on
Hourly
for
Minimum Future Hourly MinimumMaximum
Meals/
Credit
Cash
Minimum
Wage
Lodging
of:
Wage
Wage Rate
Rate
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Puerto Rico
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
40
$7.25
$8.25
($7.25 w/
health
benefits)
$7.25
$7.25
$7.50
$7.25
$7.25
$7.25
$7.85
(Exceptions
Apply)
$7.25
(Exceptions
Apply)
$8.95
$7.25
$7.25
(Exceptions
Apply)
$7.75
$7.25
$7.25
$7.25
$8.60
$7.25
$9.19
$7.25
$7.25
$5.15
None
None
None
None
None
$8.00 (eff.
12/31/13)
None
None
$2.13
$5.12
$7.25
None
$3.26
$3.99
$2.13
$5.12
$2.13
$5.37
$1.60
$5.65
(Exceptions (Exceptions
Apply)
Apply)
$2.13
$5.12
$4.86
$2.39
None
Yes
Yes
Yes
None
Yes
Yes
Yes
None
$3.93
$3.92
Yes
None
None
None
$3.625
$8.95
$2.83
$3.625
None
$4.42
Yes
Yes
Yes
None
None
None
None
$2.89
$4.86
No State-Mandated Minimum Wage
None
$2.13
$5.12
No State-Mandated Minimum Wage
None
$2.13
$5.12
None
$2.13
$5.12
None
$4.17
$4.43
None
None
$7.25
None
$9.19
None
None
$5.80
$1.45
$4.92
$2.33
(Exceptions (Exceptions
None
Apply)
Apply)
None
$2.13
$3.02
COPYRIGHT
None
None
None
Yes
None
Yes
Yes
None
Yes
Yes
None
2013 BY THE BUREAU OF NATIONAL AFFAIRS, INC.,
APPENDIX: STATE CHARTS
STATE CALCULATION OF OVERTIME FOR TIPPED EMPLOYEES
The following chart compares the federal calculation required for figuring overtime pay for tipped workers to various states that have different requirements.
Amounts calculated under state law that exceed the federal calculated amount
are to be applied.
COPYRIGHT
2013 BY THE BUREAU OF NATIONAL AFFAIRS, INC.,
41
42
Follows federal law
Overtime pay is one-and-onehalf times the regular rate of
pay for hours worked over eight
per day or 40 per week. In
Alaska, tipped employees are
entitled to the full minimum
wage for every hour worked.
Arizona has a minimum wage
law, but no overtime law. Employers are told to defer to federal requirements for overtime
calculation purposes.
Alabama
Alaska
Arizona
Overtime pay is calculated using an employee’s regular rate
of pay. The 2013 federal minimum wage is $7.25. Under federal law, employers are allowed
to subtract a tip credit up to a
maximum of $5.12 from the
regular hourly rate of an employee who receives tips on a
regular basis.
Overtime Policy
Federal
Jurisdiction
$7.80
$7.25
$7.25
Minimum
Wage
$2.13
$3.00
$4.80
$7.75
$5.12*
None
$2.13
Minimum
Hourly Cash
Wage allowed
$5.12
Tip Credit
Comments
The Arizona minimum wage rate
of $7.80 is considered the
‘‘regular rate’’ for purposes of
calculating overtime under the
Federal Fair Labor Standards
Act. Based on the regular rate,
and applying the federal formula
under which employers cannot
take a larger tip credit for an
overtime hour than a straight
time hour, the formula for each
overtime hour in Arizona is
$7.80 x 1.5 -$3.00, or $8.70.
Overtime for tipped employees
is 1.5 times the regular hourly
rate. Alaska does not allow employers to take a tip credit.
$7.25 x 1.5 - $5.12, or $5.76
When the employer takes the
In absence of a state law, fedtip credit, overtime is calcueral law applies
lated on the full minimum wage,
not the lower direct (or cash)
wage payment. The employer
may not take a larger tip credit
for an overtime hour than for a
straight time hour . For any
overtime hours worked the
maximum tip credit is still only
$5.12. The formula for each
overtime hour is $7.25 x 1.5 $5.12, or $5.76.
Calculation of OT for tipped
employees
STATE CALCULATION OF OVERTIME FOR TIPPED EMPLOYEES
March 2013
Arizona Minimum Wage Act:
http://www.ica.state.az.us/
Labor/Forms/Labor_MinWag_
FAQs_English.pdf
Alaska Department of Labor:
http://labor.alaska.gov/lss/
whact.htm
A table of state minimum
wages and tip credits for tipped
employees can be found here:
http://www.dol.gov/whd/
state/tipped.htm
Source
Payroll Strategic Whitepapers
COPYRIGHT
2013 BY THE BUREAU OF NATIONAL AFFAIRS, INC.,
COPYRIGHT
Overtime pay is one-and-onehalf times the regular rate of
pay for hours worked over 40
per week. Note the Arkansas
minimum wage of $6.25 an
hour is less than the federal
$7.25 an hour minimum. Employers covered under the federal Fair Labor Standards Act,
or with employees that are covered under the FLSA, are to apply the higher minimum wage
rate.
Overtime pay is one-and-onehalf times the regular rate of
pay for hours worked in excess
of eight per day. Employees also
must be paid one-and-one-half
times their regular rate of pay
for hours worked in excess of
40 a week. Employees who
work more than 12 hours a day
must be paid double their regular rates of pay. Employees also
must be paid one-and-one-half
times their regular rate of pay
for the first eight hours of work
on the seventh day of work in
any workweek, regardless of
the number of hours worked
during the previous six days.
When employees work more
than eight hours on the seventh
day, they must be paid double
their regular rate of pay for all
hours worked over eight.
Overtime pay is one-and-onehalf times the regular rate of
pay for hours worked over the
maximum.
California
Colorado
Overtime Policy
Arkansas
Jurisdiction
2013 BY THE BUREAU OF NATIONAL AFFAIRS, INC.,
None
$3.02
$7.78
$3.62
Tip Credit
$8.00
$7.25
Minimum
Wage
$4.76
$8.00
$2.63
Minimum
Hourly Cash
Wage allowed
The rate for overtime hours is
based upon the full minimum
wage of $7.78, but the tip
credit can be applied as per federal approach. The general formula for each overtime hour is
$7.78 x 1.5 - $3.02, or $8.65.
(Other formulas are available.)
Overtime for tipped employees
is 1.5 times the regular rate of
pay. No tip credit is allowed.
When overtime is worked by a
tipped employee, the regular
rate of pay is determined by
dividing the total remuneration
for employment in any workweek by the total number of
hours actually worked in that
workweek. A tipped employee’s
regular rate of pay includes the
amount of tip credit taken by
the employer. Any tips received
by the employee in excess of
the tip credit need not be included in the regular rate of pay
for determining overtime payments. The state has no published formula for applying the
tip credit when overtime is
worked.
Calculation of OT for tipped
employees
Comments
Colorado Department of Labor http://www.colorado.gov/cs/
Satellite?c=Page&childpagename=CDLE-LaborLaws%2FCDLELayout&cid=1249391300500&pagename
=CDLEWrapper
Arkansas Department of Labor:
http://www.labor.ar.gov/
divisions/Pages/
minWageOvertime.aspx http://
www.labor.ar.gov/divisions/
Documents/permanent_regs_minwage2007.pdf
Source
APPENDIX: STATE CHARTS
43
44
Tipped employees are exempt
from minimum wage
Overtime pay is one-and-onehalf times the regular rate of
pay for hours worked over 40
per week. Work past 8 hours/
day is not considered overtime.
Georgia
Hawaii
Overtime pay is one-and-onehalf times the regular rate of
pay for hours worked over 40
per week.
District of Columbia
Overtime pay is one-and-onehalf times the regular rate of
pay for hours worked over 40
per week.
Delaware has no overtime laws
Delaware
Florida
Overtime must be paid at the
rate of one-and-one-half times
the regular rate of pay for all
hours in excess of 40 per week.
All state and federal taxes are
required to be paid based on
the higher amount (gross
wages — in the above scenario
it would be based on $8.25 per
hour).
Restaurant employees: Workers
at restaurants, including those
in hotels, must be paid one-andone-half times the minimum
wage for all hours worked on
the seventh consecutive day,
regardless of the number of
hours worked in a week.
Overtime Policy
Connecticut
Jurisdiction
COPYRIGHT
$7.25
$5.15
$0.25
$3.02
$5.48
$8.25
$7.79
$5.02
$2.56
Tip Credit
$7.25
$8.25
Minimum
Wage
$7.00
$4.77
$2.77
$2.23
$5.69
Minimum
Hourly Cash
Wage allowed
Tips received in excess of the
tip credit shall not be included
in the regular rate. Therefore in
Hawaii, the overtime rate for
tipped employees earning the
state minimum wage would be
$7.25 x 1.5 - $0.25 = $10.625
Georgia has no overtime laws.
Fair Labor Standards Act requirements apply to covered
employees.
Overtime is minimum wage or
regular rate if higher X 1.5 minus the straight time tip credit.
Therefore the overtime hourly
rate in Florida would be $7.79 X
1.5 - $3.02 = $8.665.
Overtime is regular rate X 1.5
minus the straight time tip
credit. Employers cannot apply
a larger tip credit for an overtime hour than a straight time
hour. Therefore in the District of
Columbia the overtime rate for
tipped employees would be
$8.25 x 1.5 - $5.48 = $6.895
Employers are required to pay
nonexempt employees time and
one-half their regular rate of pay
for hours worked over 40 in a
week.
The minimum wage for waiters
and waitresses is the current
minimum wage less 31% for
tips. Therefore, the minimum
wage for waiters and waitresses is $5.69 per hour which
is calculated in the following
manner: 31% of $8.25 is $2.56;
$8.25 minus $2.56 equals
$5.69 per hour. The tip credit
for bartenders is 11 percent.
Calculation of OT for tipped
employees
Employers may pay tipped workers 0.25 less than the minimum
wages if the employees: 1.
Regularly and customarily receives more than $20 a month
in tips; and
2. The combined amount the
employee receives from the employer and in tips is at least 50
cents more than the applicable
minimum wage
Delaware defines a tipped employee as one who makes more
than $30 in tips per month
Connecticut defines a tipped
employee as one who makes at
least $10 weekly for full-time
employees or $2 daily for parttime in hotels and restaurants.
Not specified for other industries.
Comments
Hawaii Department of Labor
and Industrial Relations:
http://labor.hawaii.gov/wsd/
files/2012/12/
Tip-credit-under-the-HWHL.pdf
http://labor.hawaii.gov/wsd/
files/2013/01/12-20.pdf
Georgia Department of Labor:
www.dol.state.ga.us
Florida Department of Occupational Employment and Wages:
www.floridawages.com
District of Columbia Department of Labor: http://
www.does.dc.gov
Delaware Department of Labor:
http://
dia.delawareworks.com/laborlaw/minimum-wage.php
Connecticut Department of
Labor:http://
www.ctdol.state.ct.us/
wgwkstnd/faqs-employers.htm
Source
Payroll Strategic Whitepapers
2013 BY THE BUREAU OF NATIONAL AFFAIRS, INC.,
COPYRIGHT
Overtime pay is one-and-onehalf times the regular rate of
pay for hours worked over 40
per week.
Overtime pay is one-and-onehalf times the regular rate of
pay for hours worked over 40
per week.
Overtime pay is one-and-onehalf times the regular rate of
pay for hours worked over 40
per week.
State law does not require employers to pay overtime. Employers subject to FLSA must
adhere to federal law requiring
1.5 times for hours past 40 in a
single seven day period.
Overtime pay is one-and-onehalf times the regular rate of
pay for hours worked over 46
per week.
Overtime pay is one-and-onehalf times the regular rate of
pay for hours worked over 40
per week or for work on the seventh day of one workweek.
follows federal law
Overtime pay is one-and-onehalf times the regular rate of
pay for hours worked over 40
per week.
Overtime pay is one-and-onehalf times the regular rate of
pay for hours worked over 40
per week.
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Overtime Policy
Idaho
Jurisdiction
2013 BY THE BUREAU OF NATIONAL AFFAIRS, INC.,
$7.25
$7.50
$7.25
$7.25
$2.13
$3.62
$3.63
$3.75
$5.12*
50 percent
$2.13
$2.13
$4.35
$2.13
$4.95
$3.35
Minimum
Hourly Cash
Wage allowed
$5.12
$5.12
$5.12
$7.25
$7.25
40 percent
$8.25
$2.90
$3.90
$7.25
$7.25
Tip Credit
Minimum
Wage
Comments
Source
$7.25 x 1.5 - $3.63 = $7.245
$7.50 x 1.5 -$3.75 = $7.50
$7.25 x 1.5 - $5.12, or $5.76
$7.25 x 1.5 - $5.12, or $5.76
$7.25 x 1.5 - $5.12, or $5.76
The minimum overtime wage in
Illinois is $12.38/hour - $5.12
= $7.26
The minimum overtime wage in
Illinois for tipped employees is
$12.38 - $3.30 ($8.25 X .40) =
$9.08
Maryland defines a tipped employee as one who makes more
than $30 in tips per month
Maine defines a tipped employee as one who makes more
than $20 in tips per month
Kentucky defines a tipped employee as one who makes more
than $30 in tips per month
Kansas defines a tipped employee as one who makes more
than $20 in tips per month
Iowa defines a tipped employee
as one who makes more than
$30 in tips per month.
An employer must gross at
least $500,000 in sales or business to be covered by the federal minimum wage, but the
minimum is $300,000 for Iowa.
An Iowa employer is allowed to
pay an ‘‘initial employment
wage’’ of $6.35 per hour for the
first 90 days.
Indiana defines a tipped employee as one who makes more
than $30 in tips per month
Maryland Department of Labor:
http://dllr.maryland.gov/labor/
wages/wagehrfacts.shtml
Maine Department of Labor:
http://www.maine.gov/labor/
labor_laws/publications/
employeerightsguide.html
Kentucky Department of Labor:
http://www.labor.ky.gov/
dows/doesam/pw/
DutiesContractor/Pages/
Overtime-Requirements.aspx
Kansas Department of Labor:
http://www.dol.ks.gov/Laws/
FAQlaws.aspx
Iowa Division of Labor: http://
www.iowaworkforce.org/labor/
wagefaqs.pdf
Indiana Department of Labor:
http://www.in.gov/dol/
2345.htm#103
Illinois defines a tipped emIllinois Department of Labor:
ployee as one who makes more http://www.state.il.us/
than $20 in tips per month Illiagency/idol/faq/qamwot.htm
nois has a youth minimum wage
of $7.75 for employees under
18 for the first 90 days of employment.
Employers may pay tipped workers 18 or over a training wage
of $7.75 or $4.65 an hour if
utilizing the tip credit.
Therefore in Idaho, the overtime Idaho defines a tipped employee Idaho Department of Labor:
http://labor.idaho.gov/pdf/
rate for tipped employees would as one who makes more than
wagehour.pdf
$30 in tips per month
be $7.25 x 1.5 - $3.90 =
$6.975
Calculation of OT for tipped
employees
APPENDIX: STATE CHARTS
45
46
Overtime must be paid at a rate
of at least time-and-one-half the
employee’s regular rate of pay
for all hours worked in excess
of 40 in a week. State law does
not require overtime after eight
hours in a day.
However, for tipped employees
to be paid this rate, they must
be informed of the law, must
receive at least minimum wage
when tips and wages are combined, and all tips must be retained by the employee or distributed through a valid tippooling arrangement. Tippooling arrangements must
conform with the requirements
of M.G.L. c. 149, § 152A.
Employers must pay overtime at
time-and-one-half the regular
rate of pay.
Overtime pay is one-and-onehalf times the regular rate of
pay for hours worked over 48
per week.
Employers are required to pay
11⁄2 the regular rate of pay for
all hours worked more than 48
in a seven-day period. If the employer or employees are federally covered, then overtime
must be paid for all hours
worked more than 40 in a
seven-day period.
follows federal law
Michigan
Minnesota
Mississippi
Overtime Policy
Massachusetts
Jurisdiction
COPYRIGHT
No tip credit
$7.25 for federally covered
employees
$6.15 for large
employers that
are not federally covered
$7.25
$4.90 for nonfederally covered employees under 20
during their
first 90 days of
employment
$5.12*
$4.75
$7.40
$5.25 for
small employers*
$5.37
Tip Credit
$8.00
Minimum
Wage
$2.13
$2.65
$2.63
Minimum
Hourly Cash
Wage allowed
$7.25 x 1.5 - $5.12, or $5.76
Overtime is 1.5 x the regular
wage with no credit for tips
Minimum hourly rate for overtime is $6.35
Overtime is 1.5 x the actual
minimum or regular wage without regard to the tip credit, i.e,
$12.
Calculation of OT for tipped
employees
A large employer is an enterprise with annual receipts of
$625,000 or more or has workers employed in interstate commerce. A small employer is an
enterprise with annual receipts
of less than $625,000 and is
not federally covered .
*
Massachusetts defines a tipped
employee as one who makes
more than $20 in tips per
month
Comments
Minnesota Department of Labor: http://
www.doli.state.mn.us/ls/Pdf/
minwage.pdf
Michigan Occupational Safety
and Health Administration,
Wage and Hour Division:
www.michigan.gov/
documents/cis/MW_InfoSheet_
Tipped_ee_9_25_06_173903_
7.pdf
Massachusetts Department of
Labor: http://www.mass.gov/
lwd/workers-and-unions/
general-resources/q-and-a/
minimum-wage-faqs.html
Source
Payroll Strategic Whitepapers
2013 BY THE BUREAU OF NATIONAL AFFAIRS, INC.,
COPYRIGHT
Overtime pay is one-and-onehalf times the regular rate of
pay for hours worked over 40
per week.
Overtime pay is one-and-onehalf times the regular rate of
pay for hours worked over 40
per week.
Overtime pay is one-and-onehalf times the regular rate of
pay for hours worked over 40
per week.
Overtime must be paid at oneand-one-half times the employee’s regular rate for all hours
worked in excess of 40 per
week or eight per day.
Overtime pay is one-and-onehalf times the regular rate of
pay for hours worked in excess
of 40 per week.
Overtime pay is one-and-onehalf times the regular rate of
pay for hours worked over 40
per week.
Overtime pay is one-and-onehalf times the regular rate of
pay for hours worked over 40 in
any week of seven days.
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
Overtime Policy
Missouri
Jurisdiction
2013 BY THE BUREAU OF NATIONAL AFFAIRS, INC.,
No tip credit
$5.12
$7.80*
$4.00**
$7.25
$5.12*
$5.37
$7.50
$3.98
$7.25
$7.25
No tip credit
$3.68
$7.35
$8.25
$7.25*
Tip Credit
Minimum
Wage
$2.13
$2.13
$3.27
$2.13
$3.68
Minimum
Hourly Cash
Wage allowed
$7.50 x 1.5 - $5.37 = $5.88
$7.25 x 1.5 - $5.12, or $5.76
$7.25 x 1.5 - $3.98 = $6.89
Overtime is 1.5 x the regular
wage with no credit for tips
$7.25 x 1.5 - $5.12, or $5.76
Overtime is 1.5 x the regular
wage with no credit for tips
Overtime is 1.5 the minimum
wage $7.35 + one-half of the
minimum wage, resulting in a
total overtime wage of at least
$11.025/hour. The tip credit
does not increase for overtime
hours. If the employee does not
earn at least $3.675 per hour in
tips for the overtime hours, the
employer must make up the difference.
Calculation of OT for tipped
employees
Nevada Department of the Labor Commissioner: http://
www.laborcommissioner.com/
Nebraska Department of Labor:
http://dol.nebraska.gov/
resources/Statutes/
Wage%20&%20Hour%20Act.pdf
Montana Department of Labor
and Industry: http://
dli.mt.gov/
Missouri Department of Labor:
labor.mo.gov/DLS/
MinimumWage/faqs.asp
Source
New Mexico defines a tipped
employee as one who makes
more than $30 in tips per
month
*the listed maximum credit is
the total amount allowable for
tips, food and lodging combined, not for tips alone Food
service employees: The minimum overtime rate for food service employees is $10.88 per
hour. If the employee’s regular
hourly wage is more than the
minimum per hour, then the
overtime rate is one-and-onehalf times the employee’s actual wages. Food service employees: http://
lwd.dol.state.nj.us/labor/
forms_pdfs/lsse/mw-13.pdf
New Mexico Department of
Workforce Solutions: http://
www.dws.state.nm.us/Portals/
0/DM/Business/New_Mexico_
Minimum_Wage_Act.pdf
New Jersey Department of Labor and Workforce Development: http://
lwd.dol.state.nj.us/labor/
wagehour/content/general_
information.html
New Hampshire defines a tipped New Hampshire Department of
employee as one who makes
Labor: http://www.nh.gov/
more than $30 in tips per
labor/index.htm
month
* If providing health insurance
to employees and received by
the employee
*Businesses with gross annual
sales over $110,000
Business with gross annual
sales of $110,000 or less that
is not covered by the Fair Labor
Standards Act, unless involved
in interstate commerce
**
Comments
APPENDIX: STATE CHARTS
47
48
COPYRIGHT
Oklahoma has no overtime
laws. Follow federal law if applicable.
Oklahoma
Overtime pay is one-and-onehalf times the regular rate of
pay for hours worked in excess
of 40 per week.
Overtime must be paid at oneand-one-half times the regular
rate of pay.*
Ohio
Pennsylvania
Overtime pay is one-and-onehalf times the regular rate of
pay for hours worked over 40
per week.
North Carolina
Overtime pay is one-and-onehalf times the regular rate of
pay for hours worked over 40
per week.
Overtime pay is one-and-onehalf times the regular rate of
pay for hours worked over 40
per week.
North Dakota
Oregon
Overtime pay is one-and-onehalf times the regular rate of
pay for hours worked over 40
per week.
Overtime Policy
New York
Jurisdiction
$4.42
$7.25
$3.62 or 50
percent*
$7.25
No tip credit
$3.92
$7.85
$8.95
$5.12
$2.39
$2.25*
$1.60**
$2.35***
Tip Credit
$7.25
$7.25
$7.25
Minimum
Wage
$7.25 x 1.5 - $4.42 = $6.46
The regular rate of pay must be
computed without commissions,
bonuses, tips, or similar benefits, Oregon law specifically
prohibits employers from including tips in the amount to be
paid under the minimum wage
law at ORS 653.035(3).
For employers covered by the
FLSA: $7.25 x 1.5 - $5.12, or
$5.76
$3.63**
$7.25 x 1.5 - $5.12, or $5.76
$7.25 x 1.5 - $2.39 = $8.49
$7.83 x 1.5 - $3.92 = $7.83
$2.83
Comments
Pennsylvania defines a tipped
employee as one who makes
more than $30 in tips per
month
the listed maximum credit is
the total amount allowable for
tips, food and lodging combined, not for tips alone
**
For employers with fewer than
10 full-time employees at any
one location who have gross
sales of $100,000 or less, the
basic minimum cash wage is
$2.00 per hour, with a 50 percent maximum tip credit
*
Ohio defines a tipped employee
as one who makes more than
$30 in tips per month .
*
Employers who gross less than
$150,000.00 no overtime required for hours over 40
Tip credit is not permitted unless the employer obtains from
each employee, monthly or for
each pay period, a signed certification of the amount of tips
received.
North Carolina defines a tipped
employee as one who makes
more than $30 in tips per
month
North Dakota defines a tipped
employee as one who makes
more than $30 in tips per
month
*
overtime is regular rate of pay
Food service workers
before subtracting the tip credit **Service Employees in all Establishments
x 1.5 minus the tip credit
***
Service Employees in Resort
Hotels if tips at least $4.10/
hour
Calculation of OT for tipped
employees
$3.93
$2.13
$4.86
$5.00*
$5.65**
$4.90***
Minimum
Hourly Cash
Wage allowed
Pennsylvania Department of
Labor and Industry: http://
www.portal.state.pa.us/portal/
server.pt?open=514&objID=
553566& mode=2
http://www.oregon.gov/boli/
ta/docs/ta_col_05-19-11_
tipped_employees.pdf
Oklahoma Department of Labor:
http://www.ok.gov/odol/
documents/
WHWageLawBooklet2011.pdf
Ohio Department of Commerce:
http://www.com.ohio.gov/
laws/MinimumWageLaws.aspx
North Carolina Department of
Labor: http://
www.nclabor.com/wh/
fact%20sheets/minimum_
wage_in_NC.htm
North Dakota Department of
Labor: http://www.nd.gov/
labor/publications/docs/minwage-072008.pdf
New York Department of Labor:
http://www.labor.state.ny.us
Source
Payroll Strategic Whitepapers
2013 BY THE BUREAU OF NATIONAL AFFAIRS, INC.,
COPYRIGHT
2013 BY THE BUREAU OF NATIONAL AFFAIRS, INC.,
follows federal law
follows federal law
follows federal law
Overtime pay is one-and-onehalf times the regular rate of
pay for hours worked over 40
per week.
follows federal law
Tennessee
Texas
Utah
Vermont
Virginia
Follows federal law
South Dakota has no overtime
laws. Follow federal law if applicable.
South Carolina
Overtime pay is one-and-onehalf times the regular rate of
pay for hours worked more than
40 a week.
Sunday and Holiday Pay: Work
performed on Sundays and holidays must be paid at the rate of
one-and-one-half times the regular rate of pay. Employees cannot be penalized or discharged
for refusing to work on a Sunday or holiday.
In any workweek in which an
employee of a retail business is
employed on a Sunday or a holiday at a rate of one-and one-half
times the regular rate of pay,
the hours worked on the Sunday
or holiday must be excluded
from the calculation of overtime
pay.
Rhode Island
South Dakota
Overtime pay for employees
covered under Puerto Rico law
is two times the regular rate of
pay for hours worked over eight
during any period of 24 consecutive hours or 40 hours per
week.
Overtime pay for employees
covered under the federal Fair
Labor Standards Act is timeand-a-half the regular rate of
pay for hours worked over eight
per day.
Overtime Policy
Puerto Rico
Jurisdiction
$2.13
$5.12*
$7.25
$8.60
$7.25
$5.12*
$2.13
$4.17
$2.13
$4.43
$2.13
$5.12*
$5.12*
$7.25
$7.25
$2.13
$2.13
$5.12*
$5.12*
$7.25
$7.25
$2.13
Minimum
Hourly Cash
Wage allowed
$2.89
$5.12
Tip Credit
$4.86
$7.75
$7.25
Minimum
Wage
$7.25 x 1.5 - $5.12, or $5.76
$8.60 x 1.5 - $4.43 = $8.47
$7.25 x 1.5 - $5.12, or $5.76
$7.25 x 1.5 - $5.12, or $5.76
$7.25 x 1.5 - $5.12, or $5.76
$7.25 x 1.5 - $5.12, or $5.76
$7.25 x 1.5 - $5.12, or $5.76
$7.75 x 1.5 - $4.86 = $6.77
$7.25 x 1.5 - $5.12, or $5.76
Calculation of OT for tipped
employees
Vermont law for tipped employees applies to employees in hotels, motels and tourist place,
and restaurants who customarily and regularly receive tips for
direct and personal customer
service and who make more
than $120 in tips per month.
South Dakota defines a tipped
employee as one who makes
more than $35 in tips per
month *the listed maximum
credit is the total amount allowable for tips, food and lodging
combined, not for tips alone
Rhode Island defines a tipped
employee as one who makes
more than $30 in tips per
month
Comments
Vermont Department of Labor:
http://www.labor.vermont.gov/
InfoCenter/
FrequentlyAskedQuestions/
WageHour/tabid/157/
Default.aspx
South Dakota Department of
Labor and Regulation: http://
dlr.sd.gov/wagehrs/
minimumwage.aspx
Rhode Island Department of
Labor and Training: http://
www.dlt.ri.gov/ls/pdfs/
WageHourBook.pdf
Puerto Rico Department of Labor and Human Resources
(Spanish): http://
www.trabajo.pr.gov/
Source
APPENDIX: STATE CHARTS
49
50
follows federal law
Overtime pay is one-and-onehalf times the regular rate of
pay for hours worked over 40
per week. Minimum wage is the
same for tipped and non-tipped
employees.
Overtime pay is one-and-onehalf times the regular rate of
pay for hours worked over 40
per week.
Overtime pay is one-and-onehalf times the regular rate of
pay for hours worked in excess
of 40 per week.
Wyoming has no overtime laws.
For workers covered by the
FLSA, overtime pay is one-andone-half times the regular rate
of pay for hours worked in excess of 40 per week.
Washington
West Virginia
Wisconsin
Wyoming
Overtime Policy
Virgin Islands
Jurisdiction
$4.92
$3.02
$7.25*
$1.45*
$7.25 x 1.5 - $5.12, or $5.76
$7.25 x 1.5 - $4.92 = $5.96
$2.33*
$2.13
$7.25 x 1.5 - $1.45 = $9.43
$13.79
$7.25 x 1.5 - $5.12, or $5.76
Calculation of OT for tipped
employees
$5.80
$2.13
$5.12*
No tip credit
Minimum
Hourly Cash
Wage allowed
Tip Credit
$7.25
$7.25
$9.19
$7.25
Minimum
Wage
Wyoming defines a tipped employee as one who makes more
than $30 in tips per month
*
State minimum wage of $5.15
preempted by federal
$2.13/hour may be paid to
employees who are not yet 20
years old and who have been in
employment status with a particular employer for 90 or fewer
consecutive calendar days from
the date of initial employment
*
* For employers with six or
more employees
Comments
Wyoming Department of Workforce Services: http://
www.wyomingworkforce.org/job-seekers-and-workers/
employment-and-training/
Pages/default.aspx
Wisconsin Department of Labor:
http://dwd.wisconsin.gov/er/
labor_standards_bureau/hours_
of_work_and_overtime.htm
West Virginia Division of Labor:
http://www.wvlabor.com/
newwebsite/Documents/
wageforms/WV%20MW%20Poster.pdf
Washington State Department
of Labor and Industries: http://
www.lni.wa.gov/
WorkplaceRights/Wages/
Overtime/
Source
Payroll Strategic Whitepapers
COPYRIGHT
2013 BY THE BUREAU OF NATIONAL AFFAIRS, INC.,