Under-reporting Tips

You have employees who seem to be reporting 100% of their tips, but you have suspicion that others are not. The question is, can you ask them how much they are making on gratuity?

The answer is yes, you can ask employees how much they are making in tips to confirm that they are being properly reported. The IRS requires that all tips exceeding $20.00 per month are reported. Tips are considered taxable income and all income must be reported to the IRS. There are potentially large monetary penalties for under-reporting earnings to the IRS.

According to the Fair Labor Standards Act (FLSA), a tip is the sole property of the tipped employee and the employer is prohibited from using an employee’s tips for any reason other than as a credit against its minimum wage obligation to the employee (tip credit). Tip pool or shared tip arrangements are allowed as long as you have informed the employees before employment of the shared/tip pool amount and it may not be retained for any other purpose. Tip pools must be designated for jobs that generally receive tips (waiters and waitresses, bussers, bar tenders, etc.); jobs such as kitchen staff are not eligible for tip sharing.

Here are the requirements an employer must be in compliance with before utilizing the FLSA Tip Credit:

1) In Michigan, the minimum cash wage the employer is paying a tipped employee must be at least $3.67 per hour;

2) The additional amount claimed by the employer cannot exceed $5.98 per hour (the difference between what you are paying your employees and the minimum wage of $9.65);

3) All tips must be received by the tipped employee except for tip pooling/shared arrangements;

4) Tip credit will not apply to any tipped employee unless the employee has been informed of these tip credit provisions. If the employees are unaware of any of the above, you would have to pay your tipped employees at least $9.65 per hour in wages and they would be allowed to collect 100% of their tips.

If tips are applied on a credit card and the employer pays the credit card company a percentage on each sale, the employer may pay the employee the tip less that percentage. The only stipulations are that the tip cannot reduce the employee’s pay rate below minimum wage.

If you have employees who are working two different jobs in the same week, such as a hostess and a waitress, the tip credit is only available for the hours spent working the tipped position. For example, a waitress who spends time washing dishes or cleaning tables is considered working in a tipped occupation even though it’s not tip producing. However, if they spend more than 20% as a hostess, no tip credit may be taken during this time spent on these duties.

The experts at UAP are here to help guide with every situation, please call us today to see how we can help.