Tip accounting basics and best practices benefit restaurants and staff

Payroll accounting can be complex for any industry, but for restaurants, it can get particularly sticky. No other industry utilizes tipping as pay as much as restaurants do. Staying up to date on tip reporting best practices and abiding by tip reporting rules can help keep the process problem-free and IRS-compliant.

Tipped employees and the minimum wage tip credit

A tipped employee is any worker who regularly receives more than $30 a month in cash tips. Restaurant owners and operators are federally mandated to pay $2.13 per hour in direct cash wages to their tipped employees. The remainder of the federal $7.25 hourly minimum wage can be accounted for through tips. If tips received do not combine to amount to the federal minimum wage, the operator must pay the difference. The state in which the restaurant operates is also a factor. In states with a higher minimum wage threshold, the restaurant must meet that state’s minimum wage. Some states cap the amount of minimum wage tip credit that can be claimed, and other states do not allow a tip credit at all. (The minimum wage tip credit is explained in detail below.)

Management and tips

Owners and employees in management roles may not retain any tips intended for employees. Managers and supervisors may receive tips in certain situations, but only if that tip is paid to them directly for services they solely provided. Managers, supervisors and owners are also prohibited from participating in tip pools. Even though they are employees of the restaurants, they are not customarily tipped employees and therefore cannot take part in a tip pool arrangement.

Tip pools

Traditional tip pools are comprised of employees who customarily and regularly receive tips. At the end of the business day, employers must fully distribute all tips received. The allocation of tips to the participating employees should be based on hours worked, a point system, or another method that is reasonable and equitable.

Employees must be notified that they are participating in a tip pool, as well as the details of how the tip pool will be administered. A best practice would be to include tip pooling procedures, terms and conditions in an employee handbook given to new hires as part of the onboarding process.

Tip pools include traditionally tipped employees, as well as non-customarily tipped employees such as dishwashers and cooks. Management is specifically excluded from tip pool participation, including a non-traditional tip pool. In order to operate using a non-traditional tip pool, all employees must be paid the full cash minimum wage (so no minimum wage tip credit). Ownership is also prohibited from claiming the FICA tip credit if a non-traditional tip pooling arrangement is in place.