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When Employees Receive Tips

tipsHotel, restaurant, and casino employees come easily to mind when discussing tipped employees, but according to the $30 rule, there are many other occupations that easily qualify as having tipped employees. Some of these, though certainly not all, include hair stylists, sommeliers, baristas, ship captains and/or mates, nail technicians, taxi cab drivers, bartenders, valet attendants, pizza delivery drivers, dog groomers, musicians, and other entertainers. The actual amount of tips earned by any one employee can vary widely from one occupation to another.

Managing tips is a three-step process that tipped employees must perform, and includes:

1- Maintaining a written, daily tip record.

2- Reporting tips to the employer using a payroll data system.

3- Reporting all tips accurately on the income tax return each year.

Failure to perform these tasks can result in underpayment of income taxes and late fees which accrue interest over time.

With a five-day workweek, even employees that earn as little as two dollars a day can easily bring in $30 in tips over the course of a month. Unfortunately, most employees that qualify as tipped employees are paid a wage that is well below the standard minimum wage. The federal minimum wage laws only require that tipped employees be paid $2.13 per hour. Employers are granted up to 20 percent of the tipped employee’s gross annual salary in tax credits in order to make up the difference between the actual federal minimum wage and the wages they pay out to tipped employees.

They may deduct a tip credit from employees who earn $30 or more in tips as long as they pay the minimum approved hourly wage of $2.13 per hour. According to the Fair Labor Standards Act, employers may not use the tip credit for hours that are not tipped. For example, if a waitress spends half her shift as a non-tipped hostess, the employer cannot assess the tip credit for those specific hours.

Many states have passed different occupational minimum wage requirements that supersede the federal minimum wage. It’s important for employers to understand both state and federal minimum wage requirements as they apply to tipped employees to avoid the inaccurate garnishment of tips.

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