Tips for Calculating Tipped Employees

The Tipped Employee: Calculating Tips in Payroll Management

Timothy Lozier Blog, Federal Department of Labor, Minimum Wage, Restaurants, Tip Reporting Leave a Comment

This is part 2 in a 4 part series on payroll essentials.  In our previous post, we talked about the core components of a payroll management solution.   This part extends to tip calculation and processing payroll for tipped employees.


According to the FLSA, a tipped employee is anyone who receives more than $30 per month in tips, and need to be treated as such.  But what exactly does that mean?  Tipping is a customary and often expected addition to the staff’s service, and while it is an added benefit for the employees, it is still taxable as a wage.  So there are several considerations to understand with tip management and how it factors into payroll management.


  1. Tips are taxable: As stated, tips are considered a taxable wage and need to be reported and recorded.  So it’s important to make sure your employees are tracking tips and this information is being recorded, whether in a time collection system, the POS system or payroll management system.
  2. Understand Tip Credits’ contribution to Wage: In some cases, tips can be calculated as part of meeting the minimum wage standard.  According to the FLSA, n employer is able to take a tip credit toward its minimum wage obligation for tipped employees equal to the difference between the required cash wage (which is $2.13/hour) and the federal minimum wage.  So the employer can claim a tip credit of $5.12/hour which, combined with the 2.13/hour cash wage brings the total to the federal minimum wage of $7.25/hour.  Each locality may have its own minimum wage, so it’s important to review your minimum wage rates and how much of a tip credit you can apply to meet the minimum wage.  Any employee that doesn’t meet the minimum tip amounts will need to have the shortage made up by the employer.  This is where having a payroll management solution that automates the tip credit process can be a powerful tool.
  3. Tip Pooling: Another consideration with tip management is the concept of tip pooling.  Some business prefer to take all earned tips and pool them into one “bucket” and then distribute them evenly across the entire staff.  The benefit to tip pooling is that it makes it easier to ensure proper distribution across the different roles within the operations, and everyone involved in serving customers can be compensated for their efforts.
  4. Tips with Blended Rates and Overtime: As if it wasn’t complicated enough, when you have to calculate the overtime rates or blended rates, it can get even more complex.  Tip credits have to factor into overtime rates, and if your staff work a blended rate (say host and server) in a given pay period, it can get complex.  Below is an tip management example of calculating a pay rate with a blended rate, overtime and tip credits:

Tip Credits and Overtime



The takeaway from this is that tips, while a benefit for employees and helps to ensure they are happy, can be a complex task when processing payroll.  The key is to understand the rules and regulations, determine how you are going to manage tips at your business and, wherever possible, look to use tools to help you automate the process through a payroll management solution.


In the next part in this 4-part series, we will look at the payroll management process, and the 3 things to consider when running payroll within your operations.


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