If you own a restaurant, you may have significant questions about tips. You might wonder, for example, who exactly are the tipped employees. You may also have to ask questions like “are tips taxable?” and “can my employees pool tips?” in order to make your budgets and ensure that you operate at a profit. The truth is that tips are both more and less complex than you might think, but they make up a vital part of how your business will function financially. As such, it’s important to keep at least five major factors in mind when you’re dealing with this part of your business.
What you need to know about tipped employees
If you’re new to the restaurant world, tips can be a dangerous proposition. While they are a normal part of doing business, owners and managers who fail to understand their purpose can find themselves on the wrong side of the law and dealing with a business that has significant financial trouble. The basic factors listed below are just that – the basics – but they’ll help you to start asking the right questions and implementing policies that will ensure that your business flourishes.
1. Knowing who is tipped
What is a tipped employee? According to federal guidelines, it’s anyone who typically receives more than thirty dollars in tips per month. This is only the basic definition, though, and it’s not necessarily one that restaurant owners are going to deal with on a regular basis. In fact, it’s entirely possible to have employees you don’t treat as tipped workers who make more than this amount per month – your issues will usually be based on the paycheck that you cut your employees.
In realistic terms, a tipped employee is not only an individual who receives the minimal amount of tips per month but usually also one who is not paid the minimum wage. If your business pools tips, you’ll generally think of your waiters and bartenders as your tipped workers – your busboys, cooks, and other employees may get a share of the tips, but they will not usually qualify as tipped workers.
2. Minimum wage woes
The most common issue with paying a tipped employee is paying him or her the correct amount of money. According to federal law, a tipped employee does not have to be paid the minimum wage by his or her employer so long as his or her tipped wages equal out to at least the minimum wage. That means, as an employer, you either have to pay your employees minimum wage or keep track of their tips in order to make sure that you stay in compliance with wage laws.
As you might imagine, this can make both budgeting and payroll difficult processes for restaurant owners. You won’t necessarily know what kind of wages you’ll have to pay your staff until you know how much they’ve made from your customers. Keeping track of tips and tipped employees will be an absolutely vital part of your business, especially if you want to recapture any of the taxes you pay in the form of a credit.
3. Tips and taxes
Tipped employees are still employees. They still get a W-2 at the end of the year and you’re still responsible for paying taxes on their wages. The tips they make are also taxed – this isn’t just cash that employees get under the table, no matter how they think of the tips that they get. It’s important that both you and your employees know that tips have to be reported. If you are already keeping track of tips, of course, you’ll have fewer issues with this process.
Taxes are somewhat more difficult to predict for restaurant owners, so you might want to seek out professional help early on during the process. Always make sure to work with someone who actually understands the restaurant industry. You don’t want to fall afoul of the FBI because you aren’t paying taxes in the correct manner.
4. Tip credits
The tip credit is the amount of money that your business can claim against the minimum wage owed by your business. As you might imagine, it’s one of the most important credits you’ll get to take and something with which you’ll need to deal on a regular basis. Try to remember that there is actually a maximum amount of tip credit that you can take, and that this amount might change if you are dealing with overtime. Always work to ensure that you recapture your tip credit by keeping track of the amount that your employees are tipped and by keeping careful records during each shift.
5. The dangers of pooling
Tip pooling is a fairly common practice. In a tip pool, waiters and bartenders are required to share their tips with the workers in the back of the house. Exactly when and where tip pools are allowed can vary by state, but the general rule now is that tipped and non-tipped employees can absolutely share in a tip pool. In fact, management can even claim a tip credit on the tips that employees receive out of the pool.
It’s important to remember, though, that managers are absolutely not part of the pool. Managers cannot take money out of a tip pool or count it against an employee in any way. This money still functions in the same way as a tip when calculating income.
The five issues listed above are all good starting points for your education about tips, taxation, and other restaurant payroll matters. Whether you’re new to the world of restaurants or you just want to make sure a long-running business is still operating within the law, it’s a good idea to brush up on how tipping works and how it impacts your tipped employees. Once you have a better handle on the topic, you’ll be able to predict how your budgets will work and make sure that your employees are paid properly. For everything else, make sure to get in contact with PayTech and to take a look at our New Employee Welcome Packet.