Setup and calculations for tipped employees

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Accounting CS handles the calculations needed for employees who receive tipped wages. Use the following procedures to set up a tipped employee.

When you enter a payroll check for a tipped employee, the application checks to make sure that the minimum wage requirement is met for tipped employees in the employer's business jurisdiction. It uses whichever is the highest rate, be that the federal, state, county, or city rate. However, in certain situations, you may need to specify alternative minimum wage rates for certain tipped employees due to their job classification or for other reasons. To handle such situations, you can set an alternate rate for a tipped wage payroll item that you can use for all or just some of a client's employees. See, Specifying an alternative minimum wage rate for tipped employees, for more detailed information.

To learn about indirect tips, visit Allocate Tips.

Setting up payroll items

For tip calculations in the application to work correctly for tip credit calculation, minimum wage verification, W-2 forms, and 941 forms, the payroll items used for the client need to be set up in a specific way. Use the following steps to create payroll items for tipped employees.

Tipped wages

  1. Choose Setup > Payroll Items and verify that the correct client is listed in the drop-down list in the upper right corner of the screen.
  2. Click the Add button.
  3. Enter the description and report description that will represent the hourly wage item of the tipped employee(s), and be sure that Pay is selected in the Type field. 
  4. Select Hourly rate in the Calculation type field.
  5. Select Tipped wages in the Special Type field.
  6. If necessary, enter an amount in the Alternate minimum wage field. 
  7. Make any other selections on the Main, Tax Exemptions, Special Timing, and/or Workers' Compensation tabs if needed.
  8. Press Enter to save your changes.

Reported tips

  1. Choose Setup > Payroll Items and verify that the correct client is listed in the upper right corner of the screen. If needed, select the correct client from the drop-down menu.
  2. Enter the Description and Report Description that will represent the amount of tips the employee reports.
  3. In Calculation type field, select Fixed Amount.
  4. In the Special Type field, select Reported tips.

    The Special Type Reported Tips is excluded from Net Pay. When a payroll item is excluded from Net Pay, it does not post to the General Ledger.

  5. (Optional) Mark the Net Pay checkbox in the Exclusions section. This will include the amount in the gross pay, but not the net pay.
  6. Make any other selections on the Main, Tax Exemptions, Special Timing, and/or Workers' Compensation tabs if needed.
  7. Press Enter to save your changes.

Service Charges

Service charge is the compulsory charge for service. An example would be charging 15 percent of the bill for a large dining group. The service charge is not a tip. If an employee receives tips in addition to the compulsory service charge, the service charge will be part of the calculation for minimum wage verification for tipped employees. For more information, visit the United States Department of Labor - Wage and Hour Division (WHD).

  1. Choose Setup > Payroll Items and verify that the correct client is listed in the upper right corner of the screen. If needed, select the correct client from the drop-down menu.
  2. Enter the Description and Report Description that will represent the amount of tips the employee reports.
  3. In Calculation type field, select Fixed Amount.
  4. In the Special Type field select Service charge.
  5. (Optional) Mark the Net Pay checkbox in the Exclusions section. This will include the amount in the gross pay, but not the net pay.
  6. Make any other selections on the Main, Tax Exemptions, Special Timing, and/or Workers' Compensation tabs if needed.
  7. Press Enter to save your changes.

Employee Setup

  1. Choose Setup > Employees.
  2. Select the employee from the list and click Edit, or press Add to create a new employee record.
  3. On the Payroll Items tab mark the checkbox in the Active column on both pay items created using the steps above.
  4. Enter the hourly rate the employee is paid at.
  5. Click Enter to save your changes.

Entering payroll checks

  1. Choose Actions > Enter Transactions or Actions > Enter Batch Payroll Checks.
  2. Enter the employee's hours and reported tips as usual.
  3. Click Enter to save the payroll check or Enter Batch to save the batch of checks.
  4. Print the checks as usual, or generate liabilities for handwritten payroll checks.

If the resulting payroll check calculates a negative amount or an amount that is below minimum wage, a dialog will appear to address the issue. 

See also: Adjust for Shortfall Balances dialog, Negative Check Treatment dialog, and Minimum Wage Requirements dialog

Calculations for tipped employees

The Minimum Wage Requirements dialog displays after you enter an employee payroll check that contains payroll items that do not meet minimum wage requirements. It displays the current tipped wage rates and reported tips amounts for each check in question. The minimum wage rate used to calculate the payroll check is determined by the date of the payroll check.

If the state minimum wage rate is different from the Federal minimum rate, the application will use the higher of the two rates.

Minimum Wage Verification example

Let’s assume the following rates for a business located in Vermont:

The Vermont minimum wage rate will be used in the calculations of this example since it is higher than the Federal minimum rate.

In this example, the Employee worked 25 hours and reported tips of $100. The payroll check is calculated as follows by using the Tipped wage rate:

If you calculate the same hours worked based on Vermont’s minimum wage, you’ll see the payroll check calculates below Vermont’s minimum rate.

When the employee’s payroll check does not meet minimum wage requirements, an Alerts and Notifications - {Minimum Wages Requirements} screen will appear when you save the check. You can choose to increase the tipped wage rate to the required tipped wage rate, increase the reported tips amount to the required reported tips amount, or ignore the alert and enter the payroll without making any adjustments. Show me. 

minwagever

The adjustments are calculated as follows:

Increase the tipped wage rate to the required tipped wage rate

Since the employee did not report enough tips to calculate their wages at the minimum rate, the tipped wage can be increased to meet this threshold. Use Vermont’s minimum wage rate calculation and subtract the reported tips amount, then divide the results by the hours worked:  $262.50 less $100 Reported Tips = $162.50/25 hours = $6.50.

The result, $6.50, is the Required Tipped Wage Rate

Increase the reported tips amount to the required reported tips amount

The Minimum Wage verification determines reported tips needed to bring the employee’s wages up to minimum wage by calculating the difference between the two rates (Tipped wage rate and Vermont’s minimum rate) at 25 hours.
$262.50 - $131.25 = $131.25 

The difference, $131.25, is the Required Reported Tips Amount.

Note: When an employee works in multiple locations, the Minimum Wage Requirements verification will use the highest rate for that location. However, the allocation will be allocated to the first item that does not meet minimum wages, using the primary location first.

Overtime and Double-time wage rates

Overtime and double-time wage rates are typically calculated by multiplying the employee's wage rate for the Tipped Wages pay item by the overtime/double-time rate entered on the Payroll item or employee setup. However, if the employee's associated wage rate is lower than the minimum wage, or if the overtime/double-time wage rate needs to be adjusted to account for the below-minimum wage rate, the program calculates an employee's overtime/double-time wage rate as follows:

Overtime or double-time rate
(from the Main tab of the Setup > Payroll Items screen)
X Minimum wage rate - Tip credit amount

Example

Federal minimum wage = $7.25

Tipped wage rate = $2.40 (implying a tip credit of $4.85 because $7.25 - $2.40 = $4.85).

If the overtime multiplier is 1.5, the overtime rate becomes $7.25 x 1.5 - $4.85 = $6.03 (not $2.40 x 1.5 = $3.60).

The minimum wage is determined the same way as the tip credit reduction.

For more information, see U.S. Department of Labor Wage and Hour Division Fact Sheet #15.

Internal notes


Support: Accounting CS handles tips deemed to be wages automatically.

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