What you and your staff need to know about compliance, tips, and taxes
As restaurant owners and managers, we want to see our staff members happy and be able to keep as much of their hard-earned wages as they can.
But it’s important to know what the rules say. This guide will be important if you:
- Are new to the restaurant industry and need to know your employee rights
- Are a restaurant industry veteran who still needs clarification on rules or never had them fully explained to you
- Are a restaurant owner or manager who wants to be in compliance with rules while making sure that tipped employees keep as much of their earnings as they can
If this describes you, then this guide will be valuable reading material.
And we’ll try and keep things brief and to the point. You’ve got hungry customers, so don’t keep them waiting.
What Restaurant Owners and Managers Need to Know
Employees at Your Restaurant
As a restaurant owner, the IRS sees you as the boss and person who’s responsible for making sure that employees are paid correctly. This means that employees must claim their tips and pay their fair share of taxes. Therefore, it’s in your best interest to make sure your employees are aware of how tips and taxes work. You could be asked to provide documentation that you’ve taken this task seriously, so be sure you have practices in place to educate employees on taxes and tips.
Minimum Wage
Making sure that your employees are being paid legally is a priority. If employees do not earn tips, then they must be making at least the minimum hourly wage as stated in your state or jurisdiction.
Similarly, tipped employees must be earning enough in tips to bring their average hourly wage to at least minimum wage level. If not, you must pay the difference. All employees, tipped or not, must be making at least minimum wage.
Employee Overtime
For tipped employees, overtime is based on the legal minimum wage and not on tipped earnings. If tipped employees work more than 40 hours per week, the extra amount paid is 1.5 times the minimum wage. A portion of a required service charge for large groups must further be paid as a standard earning. This amount cannot be included in the tips that bring a tipped employee’s wages up to minimum wage level.
Training
It is important to provide documented training to employees on the legal requirements for reporting tips. Establish practices that promote honest reporting of tips. If you have any HR materials or an employee handbook, include disciplinary measures that can be used if an employee does not report tips properly.
Tip Pooling
Any tip pooling agreements should be made in writing and each participant and employee should keep a signed copy. When tracking pooled tips, include the amounts for shared tips for all participants receiving tips directly or indirectly from the pooled tips. If your restaurant practices voluntary tip pooling, you should still have documentation of the rules and of employees’ compliance.
Marking Down Tips
Employees should have practices in place to record the amount of tips that they receive every day that they work. Some systems that track hours also let employees record and track tips. However, a simple written log that requires employees to input their tip amounts each day can work just as well. The IRS has example forms and formats that can be used for such purposes, which are available at irs.gov.
Tips from Credit Cards
Records of credit card transactions and processing fees should be kept in line regardless if credit card tips are paid out daily or each week as part of payroll. It’s also important to record any fees taken out of employees’ tips. Employees should sign for any tips that are paid out from the register at the end of a shift. Such tips should also be recorded for payroll purposes and for tax calculations.
Local Laws
It’s important to be aware of state and local laws that affect tipped employees. Some municipalities have higher minimum wages than the listed federal or state minimums. Some areas also have particular laws. In New York State, for example, the Spread of Hours Rule says that if an employee with a split shift works more than 10 hours from the beginning of their first shift to the end of their last shift during a day, then that employee must receive one additional hour of pay at the minimum wage rate.
Payroll Taxes
Payroll taxes like FICA, Medicare, and Social Security must be calculated and paid by all employees. As an employer, in addition to collecting these taxes from employees’ total earnings, including tips, you must also pay the same amount on the employer side for FICA taxes. This means that, even though customers pay your employees tips, you must match their total earnings when paying payroll taxes. This rule also applies to state and federal unemployment taxes. While this may seem unfair to restaurant owners, failing to comply can mean steep fines.
Tips Statement
Even if your employees report their earned tips each day, it is good practice to have each employee sign a statement indicating the total tips that they received and were paid during each payroll period. If you are ever questioned about tips and wage compliance, such documentation will be crucial.
FICA Tip Credit
You may be able to recoup some of the excess FICA taxes that you are paying for your tipped employees. Speak with your CPA about filing for a FICA tip credit on your business taxes. To do so, you’ll need a reliable method in place for tracking accumulated tips in order to receive a tax credit.
Your Payroll Provider
There are plenty of rules and regulations when it comes to wages, tips, and taxes. Your payroll processing provider should be able to answer any questions about payroll. If you have questions, contact ASAP Payroll to learn more.
