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Reported Tips in Payroll

Background

When you have employees who receive tips, you will need to report their tips in their payroll so that proper income tax can be withheld on those earnings.  For more information about paying tipped employees, see our blog article, How to Handle a Tipped Employee and Their Pay.

Patriot handles reported tips but not allocated tips. To read more about allocated tips, visit the IRS website.

How to Add Tips to an Employee Pay

There are two kinds of tips that you can use when paying your employees’ reported tips.

  1. Go to Settings > Payroll Settings > Hours and Money Types > Money Types to see the preset tip types. You can mark these money types as “frequently used” on the Settings page so they always appear on step 1 of payroll.  Otherwise, you can toggle “Show All Hours/Money” at the top of step one in payroll.
    • Tips – Already Paid:  Use this Money Type if the employee has already been paid the tips.
      • These tips will appear as taxable earnings, reported in Box 7 of the employee’s W-2, and income tax deductions will be withheld.  
      • These tips will not be included in their net pay, but will only have taxes calculated on the amount you enter.
    • Tips – Owed:  Use this Money Type if the employee needs to be paid the tips (e.g., the tips were added to a credit card that the employee has not yet received).
      • Similar to “Tips – Already Paid,” these tips appear as taxable earnings, reported in Box 7 of the employee’s W-2, and income tax deductions will be withheld.  
      • These tips will be included in their net pay.
  2. Go to Payroll > Payroll Tasks > Run A New Payroll.
  3. If you have not marked the Tips money types as favorites you will need to toggle the “Show All hours/money at the top of step one of payroll.
  4. Enter the tip amounts, either in “Tips – Already Paid” or “Tips – Owed.”
  5. Continue to add hours and any other necessary earnings and continue to the next step of payroll.
  6. Complete the rest of payroll as usual.

Note:  The employee’s gross wages must be greater than their reported tips so there is enough money to withhold taxes. If the amount of tips exceed gross wages, this will cause a negative net pay, and the payroll will not be processed.

[DEFINITION: Reported Tips]

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