If you run a restaurant, you probably remember what it was like to be a tipped employee — after all, 80% of restaurant owners and 90% of restaurant managers had entry-level positions when they first started their careers in the industry, according to the National Restaurant Association.
In fact, the National Restaurant Association also reports that 63% of working adults have held a job in the restaurant space at some point. Perhaps that explains why when asked which professions deserve tips the most, 71% of people surveyed said restaurant workers.
Many operators know firsthand what it was like to receive cash tips at the end of the day, taking home extra earnings to supplement their wages. But today, running payroll can be a lot more complicated, especially as credit and debit cards have become the go-to payment method for an ever-growing number of customers.
That's why incorporating tip payments into your payroll processes is a great solution for restaurant owners. Rather than spending valuable time manually collating employee earnings across spreadsheets, timecards, and schedules — all while calculating tips, overtime, withheld taxes, and benefits — it's much more effective to streamline these processes through a single payment platform. Plus, this helps increase the accuracy of your financial records while reducing the risks and liabilities that come with keeping cash on premise.
Why restaurant payroll compliance is a priority
There are a considerable number of rules, regulations, and technicalities when it comes to tipping. For instance, to be considered a tipped employee, a team member needs to regularly earn at least $30 in tips per month, and these tips are considered taxable income. However, tips are not taxed when they total less than $20 per month.
Also, to count as a tip, a payment needs to be freely made by the customer who can choose how much to give and who it should go to. Fees imposed by the restaurant — for instance, auto-gratuities for groups above a certain size — are service charges, even if they effectively function as a type of tip.
As if that's not enough for restaurant owners to keep track of, there's a wide range of minimum wage and overtime laws across regions and states, which may complicate matters for restaurants that operate across multiple jurisdictions. Because of the Fair Labor Standards Act (FLSA), "tip credits" let employers pay lower wages to tipped employees as long as their tips are sufficient to shore up their earnings to the local minimum wage — but if they pay less than that, they could end up facing fines, penalties, and even lawsuits.
Finally, bear in mind that rules and regulations around tip pooling differ from place to place. Not only do you need to create a compliant policy, but also formalize it in writing — and ensure that your employees are fully aware of it and any updates you make. However, there's no minimum or maximum contribution for tip pools specified by the FLSA.
The importance of accuracy in paying out tips to employees
If your employees receive their tip earnings at the end of their shift, they may appreciate the instant money in the short-term. But as an owner or manager, the challenges of cross-referencing employees' self-reported tip earnings with sales data, as well as the potential pitfalls of inaccurate recordkeeping, pose long-term risks to your business.
So, as more payments happen electronically, it makes sense to adopt a modern tipping strategy to integrate with your payroll processes. A payroll tipping solution can help you track tip earnings, mitigate overpayment and underpayment, ensure taxes on tips are properly applied, and distribute the right payments to the right people. It may spell the end of cash tips, but at the end of the day, adding paycheck tips directly to employees' wages reduces your admin time and compliance risks.
For restaurant owners like Cody Pellerin, who runs Americano Lounge in Nashville, having intelligent digital payroll systems drastically reduces business costs and ensures every employee is paid the tipped wage they're owed.
"If I had to hire someone to do all this for me, it would be costing me a fortune. There's so much that can go wrong when it comes to payroll, there's no good reason to try to do it yourself. I would tell anyone starting their own business that they absolutely have to hire ADP."
How to do payroll for tipped employees
Tips are taxable income, which means once you've totaled the tips your employees have made, this is combined with their hourly wages to calculate their gross pay. After that, you can determine their net pay by deducting the employee's federal and state income taxes (FICA) — which include social security and Medicare — and the federal unemployment tax (FUTA). Itemize these deductions on the pay slip so your team understands how their net pay was derived.
When it comes to tipped employees, Form 8027 is especially critical. It applies to all businesses that qualify as a "large food and beverage establishment" — this means any restaurant that isn’t fast food, serves patrons on the premises, employs more than 10 people on an average business day, and includes tipping as a standard practice.
An advanced, user-friendly payroll system like ADP enables you to access and file this form with the IRS to report annual receipts from food and beverage tips, as well as tip allocation. Integrations are also built into the platform to help business owners like Skyler Blacknall of Smoothie King capitalize on potential tax savings — for instance, the work opportunity tax credit (WOTC) may be available to restaurants.
"I believe ADP will play a key role in helping me move forward. Without a successful payroll system, it's very hard to grow, to be successful. ADP will definitely help me achieve my goals."
Be transparent when paying credit card tips to employees
These days, your employees are likely receiving more electronic tips than ever before, thanks to the ability for customers to provide non-cash tips directly through the point of sale system. When prompted to tip, 41% of Americans always do, while 35% will often tip, 19% sometimes tip, and only 4% rarely tip.
Of course, your staff should be keeping their own daily tip records and reporting them to you, but you can help them by having a payroll system that makes it easy to access their payment information on desktop or mobile devices. This will enable you to quickly resolve any discrepancies that emerge, and it will help employees when they have to report their tip earnings on their own taxes.
Ultimately, tracking and paying tips through payroll simplifies the tip out structure for your business, while uncovering efficiencies and ensuring compliance with tipping rules and regulations. Rather than spending endless hours crunching numbers in the backroom, you can focus on what you do best — providing amazing food and experiences to your customers.
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