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The Pitfalls of Payroll for Tipped Employees
James Pellino

All industries have their own unique challenges and quirks. For a restaurant or bar, one unique aspect is how to run payroll for tipped employees. Bars and restaurants need to deal with tips and gratuities, service charges and meals to employees every time they run payroll. Below is a quick crash course on what you need to know about tipped employees before your run your next payroll.

A tipped employee is anyone who customarily receives more than $30 a month in tips. Tips received by an employee are subject to FICA taxes, federal and state income tax withholdings, and federal and state unemployment taxes (up to the current wage base). All employees receiving tips should report the total amount received to the employer in writing. The IRS has created Form 4070 that the employee can fill out for this purpose. This should be reported each month by employees by a set date (say, by the 10th of each month).  For practical purposes, this is usually done each pay period or daily from the POS system.

For tipped employees, regular earnings, tips, service charges and meals can be included in their paycheck.  As an employer, you need to ensure that all of the items above total at least the state or federal required minimum wage – depending on which one is higher – paid to the employees.

If you give your employees meals on the job, this may also be considered compensation.  To determine if the food you give employees should be treated as compensation you should ask yourself three questions:

  1. Were the meals furnished in kind (i.e., you furnished meals, not groceries)?
  2. Were the meals provided for the convenience of the employer?
  3. Were the meals provided at the employer’s business premises?

If the answer to all three of these questions is “yes,” then the value of the meals should not be included in taxable compensation to the employee.  However, if you answered no to anyone of those three questions, the fair value or reasonable cost of the meal should be considered compensation to the employee and be included as compensatory wages for minimum wage purposes.  The value of the meal should not include any profit to the employer.

Payroll is an important issue for every business, but with the nuances a restaurant or bar has to handle, it is imperative that it is done correctly. There are many other aspects to a restaurant’s or bar’s payroll that is not included in this blog. For example, many times net checks of tipped employees are not enough to cover all of the respective FICA taxes and other deductions. Knowing which order to take deductions is extremely important. If you have any questions regarding your payroll, please contact Jim at [email protected] or 312.670.7444.

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