Payroll CS can perform calculations for three types of tipped wages:
- Allocated Tips
- Reported Tips
- Tips Deemed to be Wages
To have the application perform any of the tip pay calculations, select the appropriate pay item in the Setup > Employees window or the Setup > Employee Templates dialog.
Each type of tip pay calculation requires that a Tipped Wages pay item be set up in the Employees window. To initiate the proper calculations for any tipped employee, you need to include at least one Tipped Wages pay item when setting up information in the Employees window:
Note: Payroll CS is shipped with a Tipped Wages employee template that contains Tipped Wages, Reported Tips, Tips Deemed Wages, and Other Wages pay items.
If your firm uses Payroll CS to process payroll for the client, do not mark the CBS Client checkbox on the General Information tab of the File > Client Properties dialog. Marking that checkbox would prevent you from being able to set up tipped wages and other calculating payroll items unavailable within CBS.
Automatic minimum wage verification
Because there are issues that may need to be addressed if an employee is paid less than minimum wage, Payroll CS is designed to alert you if this situation occurs when you enter and then save a payroll check for an employee with tipped wages.
Setup: If your client uses a minimum wage different from the federal minimum wage, make sure that minimum wage is entered in the Client minimum wage field in the Calculating Payroll tab of the File > Client Properties dialog.
Tip credit reduction
Employers of tipped employees can take a tip credit, which allows them to pay the employees less than the minimum wage under the assumption that the employees will earn at least the difference in tips. If the employees do not earn enough to bring them up to minimum wage, the tip credit needs to be reduced (in other words, the employee's wage needs to be increased).
Payroll CS can automatically calculate the tip credit reduction for a payroll check that includes allocated tips, reported tips, indirect tips, and/or tips deemed to be wages. When you enter payroll check information in the Payroll Check Entry window for an employee, the application calculates the reduction as follows:
If the effective wage rate is greater than the minimum wage, the application determines the amount of tips that are needed to bring the employee's pay up to the minimum wage requirement. The remaining amount of total tips can then be allocated to any subsequent tipped wage rates that are below minimum wage.
If the effective wage rate is less than the minimum wage, the application performs the following calculation for tip credit reduction:
Note that the minimum wage rate is derived from:
- Setup > System Configuration > Payroll Tax Information > Federal Tax Information dialog > Federal minimum wage field or
- File > Client Properties > Calculating Payroll tab > Client minimum wage field (If the client uses a minimum wage different from the federal minimum wage, the client minimum wage will override the federal minimum wage.)
The amount of the tip credit adjustment is added to the wage rate for the gross pay item assigned to the Tipped Wages pay item, and the application displays a prompt showing the pay item and amount of the wage increase. If the overtime and double-time calculations are affected, they will be recalculated.
See Overtime and Double-time Wage Rates.
Setup: The tip credit reduction requires that a Tipped Wages pay item and a Reported Tips pay item be set up for the employee.
Check entry: Enter the number of hours for tipped wages and the amount of reported tips (or, the application can calculate the tip credit reduction as a percentage of sales or a dollar per hour amount).
Calculation: If the application calculation determines that the Reported Tips amount is insufficient to bring the Tipped Wages item up to minimum wage, it calculates the rate increase needed and queries whether it should make the change.
To determine the minimum wage, the application first checks to see if the employee is marked as a user of the Alternate minimum wage (Setup > Employees > Personal tab), then it checks to see if a Client minimum wage rate has been entered in the Calculating Payroll tab of the File > Client Properties dialog. If so, the latter wage rate will be used. If not, the Federal minimum wage rate entered in the Setup > System Configuration > Payroll Tax Information > Federal Tax Information dialog will be used.
Note: If there are multiple Tipped Wage pay items, the application calculation will go through them one by one to determine whether the reported tips cover them all. For example, if there were $500.00 in reported tips and it took $375.00 to cover the first tipped wage rate, there would be $125.00 left over to be used toward the second tipped wage rate.
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 Other tab of the Employees window. 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 application calculates an employee's overtime/double-time wage rate as follows:
|Overtime or double-time rate
(from Other tab of the Employees window)
|X||Minimum wage rate||-||Tip credit amount|
Federal minimum wage = $7.25
Tipped wage rate = $2.40 (implying a tip credit of $4.85 (or $7.25 - $4.85 = 2.40).
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.
Payroll CS can automatically allocate tips to employees who are set up with the necessary pay items in the Employees windows.
Setup: The employee record must include a Tipped Wages pay item, an Allocated Tips pay item, and a Reported Tips or Indirect Tips pay item.
Calculation: (Allocated tips are not included in the net pay calculation as long as this is how it is setup in Setup > System Configuration > Pay Items > Special Information tab.) Tips are always allocated on a year-to-date basis, and you may allocate tips as many times as you want throughout the year.
The application uses amounts entered in the Reported Tips and Indirect Tips pay items when calculating the tip allocation. If you choose to allocate tips based on the number of hours worked, Payroll CS will use the number of hours entered for the Tipped Wages pay item. If you choose to allocate tips based on the client's gross receipts, Payroll CS will use the amount of sales entered for each employee that has a Tipped Wages pay item assigned in the Employees dialog.
Reported tips are calculated based on either a percent of sales or a dollar per hour amount. The calculation is determined by the properties of the reported pay item.
Setup: Select the employee and add a Tipped Wages pay item and Reported Tips pay item. For the latter, you need to enter the appropriate information in the % of sales field of the Pay Item Properties dialog to indicate the amount of tips to declare.
Calculations: (Reported tips are not included in the net pay calculation as long as this is how it is setup in Setup > System Configuration > Pay Items > Special Information tab. However, you can change this setting by selecting Setup > System Configuration > Pay Items > Special Information tab.) The tips will be calculated as a percent of sales.
(By default, indirect tips are not included in the net pay calculation. However, you can change this setting by selecting Setup > System Configuration > Pay Items > Special Information tab.) Indirect tips are simply tips that you manually report on a payroll check. However, these tips still need to be identified by a pay item so they will be included in the tip allocation calculation.
Setup: For each employee who reports indirect tips, set up an Indirect Tips pay item in the Setup > Employees dialog.
Calculation: Manually enter the amount in the Payroll Check Entry window.
Tips deemed to be wages
When filling out a tax return, employers of tipped employees may take a credit for the employer portion of FICA paid on tips over and above the minimum wage. The reporting for this involves determining the amount of tips declared that covered the difference between minimum wage and tipped wage rate. Those tips are called Tips Deemed to be Wages (TDW) - the tips that the employee declared that were considered to be wages for reporting purposes. TDW is similar to a memo for storing a number to be used at the end of the year to fill out a Form 8846 for the IRS; it should not be included in Gross Pay or Net Pay. The TDW amount on any check will be the lesser of the amount of tips required to bring the employee up to the federal minimum wage or the amount of tips reported less any TDW reductions.
Setup: In the employee record (Employees window > Earnings tab), include the following pay items.
- Tipped Wages pay item. You can set up one or more Tipped Wages pay items.
- Reported Tips pay item.
- Tips Deemed to be Wages pay item.
Calculation: (By default, tips deemed to be wages are not included in the net pay calculation. However, you can change this setting by selecting Setup > System Configuration > Pay Items > Special Information tab.) Payroll CS reviews the payroll checks during data entry to determine whether the employee meets the federal minimum wage requirement entered in Setup > System Configuration > Payroll Tax Information > Federal Tax Information dialog. If the employee does not meet the wage requirement, the application automatically calculates the amount of tips necessary to bring the employee up to the federal minimum wage for the payroll check. The lesser of that amount or the amount of declared tips is considered the amount of tips deemed to be wages for the pay item.
- Because Tips Deemed to be Wages is just calculated and stored and should have no effect on actual pay, this item will often be marked to not display in data entry.
- Effective as of 07/24/07, the amount used for TDW calculation is always $5.15, not the federal minimum wage, even if a client-specific minimum wage is entered.
- The calculation requires at least one Tipped Wages item and a Reported Tips pay item to perform the calculation. If there are any TDW reduction items, they will also be taken into account.
- TDW rate = $5.15
- Reported tips = $100.00
- Wage rate = $3.00
- Reported hours = 20.0
Payroll CS would automatically perform the following calculations:
- Calculate the wages paid as minimum wage (total hours worked x federal minimum wage).
20 x $5.15 = $103.00
- Take the difference of wages paid at minimum wage and the total amount of tipped wages.
$103.00 - $60.00 = $43.00
- Determine the lesser of the amount calculated in Step 2 above and the amount entered in the Reported Tips pay item.
$43.00 < $100.00 (amount of direct tips)
- Because the amount from Step 3 ($43.00) is less than the amount of direct tips ($100.00), enter the amount from Step 3 in the Tips Deemed to be Wages pay item.