If you employ people in positions that commonly receive tips or gratuities, it’s important to stay abreast of your responsibilities as an employer.
Requirements for taking tip credits
The current federal minimum wage is $7.25 per hour; employers may claim a tip credit to pay $2.13 per hour if employees make up the difference through tips. If an employee doesn’t make enough in tips to reach minimum wage, the employer must make up the difference.
Employers must provide oral or written notice to their employees that they are taking this tip credit. We recommend communicating this information in writing with a place to sign and date these employee notifications.
Tip pooling
Recent regulations allow employers who don’t take a tip credit to create a pool that shares tips with “back of the house” employees, such as cooks and dishwashers. If a tip pool is being used, employers must fully redistribute the tips within the pay period.
According to the Fair Labor Standards Act, employers, managers, and supervisors are not allowed under any circumstances to keep employees’ tips, including through tip pools. In fiscal year 2021, the US Department of Labor (DOL) identified nearly $35 million in back wages owed to more than 29,000 food service industry workers, with violations commonly related to employers retaining tips. In one case, investigators from the DOL found that a Texas barbecue chain owes $230,353 in back wages to 274 employees after management illegally kept tips from employees.
Recordkeeping requirements
Here are some basic reminders about reporting tips to the Internal Revenue Service (IRS):
- Employees who receive cash tips of $20 or more in a calendar month while working for you are required to submit written reports of their total tips by the tenth day of the following month.
- Employees can use Form 4070A, Employee’s Daily Record of Tips to keep a daily record of their tips, and Form 4070, Employee’s Report of Tips to Employer to report their tips to you. You may also provide another system, such as electronic tip reporting.
- You must use the tip report from your employee to calculate the correct amount of Social Security, Medicare and income tax withholding.
- If you operate a large food or beverage establishment, you must file Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips for each calendar year, and you may be required to allocate tips to your employees.
If you have questions about tip allocation and reporting, MarathonHR is here to offer our expertise, including our human resources solutions for the restaurant industry.