Want to make sure you're reporting and managing tips in a way that's not only fair to your employees but also protects your bottom line?
If you own a service business, tip calculation is likely to be an everyday event. But handling tips appropriately doesn't mean simply divvying up the extra earnings among your staff members. Business owners must also consider ramifications like credit card transaction fees and FICA compliance.
Want to make sure you're reporting and managing tips in a way that's not only fair to your employees but also protects your bottom line? Here are four considerations about tip calculations to keep in mind.
Credit Card Transaction Fees on Tips
If a customer at your restaurant pays their bill — including a tip — with a credit card, you'll be on the hook for the credit card transaction fee to process that transaction. If, for instance, the credit card company charges 3 percent per transaction and the bill is $60, you'll pay $1.80 to the credit card company. If the customer adds a $10 tip, your credit card transaction fee just went up $0.30 to $2.10.
Some business owners pass along that additional transaction fee to their employees, which is generally permissable at the federal level, but may be prohibited at the state and local level. This includes, but isn't limited, to California and Colorado. Both of these states have expressly prohibited employers from deducting processing fees from tips. The federal Department of Labor (DOL) maintains that deducting fees is permissable. However, you cannot deduct more than the total amount of the transaction fees. If deducting credit card processing fees from tips would bring an employee's hourly rate below the minimum wage, you are not allowed to deduct the fees.
Once you determine how to handle transaction fees, put that policy in writing. Communicate it clearly and obtain a record of receipt and acknowledgment from each employee. Make sure you apply the policy equally to all tipped employees.
Mandatory Tip Pooling
It's common for owners of restaurants, bars, casinos and other service-based businesses to require employees to contribute a portion of their tips to a mandatory tip pool to be evenly distributed among the whole group. While this practice is generally permissiable at the federal level and in most states, there are certain caveats, so make sure you're following the rules if you choose to use tip pooling. At the federal level, all members of a tip pool or sharing arrangement must be employees who regularly receive tips (at least $30 per month). However, keep your eye on the news, as potential rules changes are in the works that could expand what employers can do when it comes to tip pooling.
The FICA Income Tax Credit
Under the table doesn't cut it when it comes to tips. You must pay FICA taxes for each employee's total income, including all tips. Fortunately, you can earn a tax credit to help defray some of these costs. To qualify, you must be able to demonstrate that tipped employees receive at least the minimum wage when direct (or cash) wages and the tip credit amount are combined. To claim the credit on your tax return, you must complete IRS Form 8846.
Minimum wage requirements are another compelling reason to carefully calculate tips. Many states have a lower minimum wage for tipped workers, according to the DOL. However, you cannot compensate an employee at this lower rate unless you document that the tips the employee receives brings their wages up enough to equal or exceed the general minimum wage threshold. Called a tip credit, employers must meet this standard to be in compliance with the FLSA.
For example, in Colorado employers must pay tipped workers a minimum wage of $7.18 per hour and their tips must average out to be at least $3.02 per hour. This brings the minimum total compensation of a tipped worker up to $10.20 per hour, which is Colorado's general minimum wage.
Tip calculation may represent an important part of your employees' earnings. And with proper planning, including consulting with experienced legal counsel, you can make sure that your business benefits from generous customers at the same time your employees do.
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