As an employer, you’re responsible for managing and paying your staff to meet regulations laid out by the government. If calculating employee payroll is causing confusion or stress, you’ve come to the right place.
We scoured multiple government agencies for relevant information and combined it with our firsthand knowledge of the food and beverage industry. The result is this information-filled guide brimming with the details you need to know about paying tipped employees.
Read on for a guide to paying tipped employees, including information on helpful tax breaks for employers in the restaurant business.
Do restaurants have to pay minimum wage for all employees?
According to the U.S. Department of Labor, a tipped employee “engages in an occupation in which he or she customarily and regularly receives more than $30 per month in tips.” In light of this definition, the vast majority of restaurant servers fall into the tipped employee category.
When it comes to the question, “Do restaurants have to pay minimum wage?” the simple answer is yes, but it is less than the standard minimum wage.
Employers are required to pay their tipped employees the cash minimum wage of $2.13 per hour. It’s important to remember that the server minimum wage does not reflect the whole compensation picture.
The reason for this low minimum wage for tipped employees is that tips generally make up the difference for servers. In other words, the number of tips earned in conjunction with the server minimum wage will equal (or surpass) the federal minimum wage of $7.25 an hour. Remember this detail later, as it’s an important part of figuring out how to pay restaurant employees.
Generally, servers earn hourly wages above the federal minimum wage thanks to tips from customers. However, if servers do not earn sufficient tips to bring their wages to $7.25 an hour (or the state-mandated minimum wage), the employer must make up the difference.
To recap, the Fair Labor Standards Act specifies that the minimum wage for tipped employees is $2.13 per hour. The combined cash and tip minimum wage rate must equal up to $7.25 per hour.
Minimum wage for servers by state
Since state and local governments have control over the minimum wage in each specific jurisdiction, the server minimum wage depends on the location of the restaurant.
There are 16 states that have the same $7.25 minimum wage as the federal requirement. They are:
- North Carolina
- North Dakota
- New Hampshire
A handful of states do not have a required minimum wage for waiters and waitresses. These states adhere to the federal minimum wage requirements. They are:
- South Carolina
The remaining states each have a minimum wage that is above the federal requirement. In these states, employers must ensure that employees earn the state-mandated minimum wage.
Explore the minimum wage laws for servers in each state below.
|State||Minimum Wage Requirement|
|Nevada||$9.00 for workers without healthcare benefits; $8.00 for those with healthcare|
The restaurant minimum wage data above comes from 2020 U.S. Department of Labor reports.
As you can see, the way the minimum wage laws play out is more complex than a straight ‘yes’ or ‘no.’ Now that we’ve covered the minimum wage for waiters and waitresses by state, it’s time to dive into how payment works.
How is tipped payroll calculated?
To understand how to pay tipped employees at a restaurant, we’ll use a handy tool called a tip credit.
Earlier, we discussed how an employer could pay as low as $2.13 as long as tips bring the server’s pay up to the federal or state minimum wage. For instance, if an employee in Idaho made no tips on a shift, an employer would have to pay an additional $5.12 an hour to make up the difference.
However, if the employee makes enough tips to meet or surpass the restaurant minimum wage in the state, the employer does not have to pay extra. The ability to allow tips to cover the difference is known as the tip credit.
Some employers utilize a tip pooling system in which employees place tips ( a full or partial amount) into a shared fund. The tips are then distributed to a larger group of employees, including ones that would not normally receive tips for their work.
The Fair Labor Standards Act lists tip pooling as an acceptable practice. A 2018 amendment to the FLSA specifies that “employers who pay the full FLSA minimum wage are no longer prohibited from allowing employees who are not customarily and regularly tipped—such as cooks and dishwashers—to participate in tip pools.”
However, some states regulate tip pooling and others do not allow the practice at all. Consult the guidelines from the department of labor in your state to find out if your restaurant is able to participate in tip pooling.
If you utilize tip pooling or will in the future, be sure to follow the FLSA guidelines including:
- Prohibit managers, supervisors and directors from participating in the tip pool.
- Ensure that all employees participating in the tip pool are paid the state-mandated minimum wage.
Pro Tip: Proactively inform your tipped employees about payroll, tip credit and minimum wage to avoid confusion. Learn about the necessary components of a restaurant employee handbook.
How employers can use a tip credit
Tip credits are a provision of the Fair Labor Standards Act. Before an employer may utilize the tip credit provision, there are a few things they must notify the employee about.
First, the employer must let the employee know what the cash wage they will be earning is (it must be at least $2.13 per hour).
The employer also needs to inform the employee what amount will be claimed as a tip credit. In this instance, “claimed” simply means that the tips will count towards the minimum wage requirement. The tips remain the property of the employee.
Before utilizing the tip credit, an employer must also tell the employee:
- The tip credit claimed by the employer cannot exceed the number of tips actually received by the tipped employee;
- That all tips received by the tipped employee are to be retained by the employee except for a valid tip pooling arrangement limited to employees who customarily and regularly receive tips; and
- That the tip credit will not apply to any tipped employee unless the employee has been informed of these tip credit provisions.
Once the employee is made aware of this information, an employer is authorized to utilize a tip credit.
Federal regulations state that the maximum tip credit that an employer can count towards wages is $5.12 per hour. But this varies depending on the state.
Some states have different tip credit limits, while others do not allow a tip credit to be taken. The states that do not allow employers to utilize tip credits are:
You can find specific tip credit maximum information regarding your state in the U.S. Department of Labor resource center.
Can restaurants get a tax break on reported tips?
A special provision for businesses in the food and beverage industry is called the FICA Tax Tip Credit. Before delving into the credit, let’s examine how employee tips are taxed.
We’ll turn to the U.S. Department of the Treasury for details.
Under the Federal Insurance Contribution Act or FICA, tips that employees receive are viewed as wages and subject to income tax. Employees who make more than $20 in tips each month are required to report this income to employers. Based on these reported tips, employers withhold employee’s share of FICA tax and pay the employer’s share of FICA taxes.
The FICA Tax Tip Credit allows employers to pay a reduced tax rate on federal income. The U.S Department of the Treasury explains:
“Under a comprehensive income tax, businesses may deduct FICA taxes paid from taxable income because such taxes are a legitimate business expense. The credit results in a reduction in tax liability below the level implied by the baseline tax system.”
To determine what the reduced rate will be, employers must examine employee wages.
If non- tip wages are more than $5.15 an hour:
“… FICA tip credit equals the full amount of the employer’s share of FICA taxes paid on the employee’s tip wages.”
If non- tip wages are less than $5.15 an hour:
“The credit equals the employer’s share of FICA taxes paid on the employee’s hourly tip wages after reducing that tip wage by the difference between the employee’s non-tip hourly wage and $5.15.”
Take employee payment headaches off of your plate
When you consider the many regulations, tax requirements, and minimum wage laws in place, it’s clear that calculating employee pay is no walk in the park. Fortunately, there is a simple alternative to finding kitchen staff and calculating employee pay.
At Qwick, we connect restaurants and bars with top-tier back of house Professionals. Our on-demand service allows you to request the number of Professionals that you need and the dates and times you need them. Because the Professionals are 1099 contractors, the stress of taxes and other employee requirements do not fall on your shoulders. Best of all, we figure out payroll so you can focus on the other important elements of your business.
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