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Tips Divided: Reporting Tip Income When Your Employees Share a Tip Pool

Payroll
Article
07/14/2017

Many restaurant employees thrive on the tips they make each night. For restaurant owners, reporting tip income can be a burden if they have several tipped employees, which is why pools or other tip sharing arrangements can make things even more complicated. Let’s look at how tip income should be reported, and how this may affect your decision to use a tip pool in your restaurant.

Federal Requirements for Reporting Tips

As an employer, you must comply with any and all federal requirements concerning tips received by all employees. For the purposes of reporting tip income, however, the U.S. Department of Labor classifies tipped employees as those who customarily and regularly receive more than $30 per month in tips.

While the responsibility for honestly and accurately reporting all tips (both credit card and cash) falls to the employee, the employer is responsible for meeting all other aspects of the federal reporting requirements. These include but are not limited to:

  • Educating and training all employees on proper reporting methods for tips
  • Gathering tip reports from each employee at least once per month
  • Paying FICA and state income taxes on employee tipped income
  • Filing IRS Form 8027 if your restaurant regularly accepts tips and employs more than 10 workers
  • Applying for the FICA Tip Tax Credit on IRS Form 8846 if desired
  • Ensuring that tip reporting for all employees meets the federal minimum threshold of 8 percent of gross receipts
  • Verifying the accuracy of the reports with any employee who does not meet the minimum threshold and applying for a special exception with the IRS

reporting all cash and credit card tips

While these requirements are certainly extensive, employers face additional responsibilities when employees participate in a tip pooling arrangement.

Tip Pooling Organization

While employers are generally prohibited from retaining any part of an employee's tips, the federal statutes do allow employers to organize a tip pooling arrangement for tipped employees. Tip pools can be organized on a flat amount basis, by a point system, or on a percentage basis. Regardless of how the tip pool is organized, it is best practice to keep a consistent system that is clear and easy to follow for all employees. If your tip pool is mandatory, the tip pool arrangement must also be clearly outlined for all new employees upon hire.

Benefits of Tip Pools

With the extra maintenance and reporting requirements, some employers may question whether a tip pool is worthwhile. For some smaller restaurants, it may not be. Tip pools generally benefit employers most when there is a significant disparity between key positions in the daily operations of the restaurant. For example, if your restaurant utilizes a host staff, the hosts often do not receive tips and usually make a minimal hourly wage in comparison to wait staff or bartenders once tips are considered. Without a tip pool, you may find it difficult to find employees willing to fill this important role. By allowing hosts to participate in the tip pool, employers can offer an extra incentive for qualified employees to stay in this position. Employers can also organize tip pools to benefit employees willing to work otherwise-undesirable shifts. When organized and utilized properly, a tip pooling arrangement can be an important tool to making sure that all staffing needs are met.

Tip Pooling Considerations

A final important consideration when reporting tip income for your restaurant involves how the tip pool may affect your bottom line. You may qualify for the FICA Tip Tax Credit if your company meets certain basic requirements. However, a tip pool could affect how much of a credit you can claim. On the other hand, a tip pool could help offset the minimum wage requirement for employees who may not otherwise receive enough in tips to make up the difference. Finally, it could cost your organization a significant amount of time, and ultimately money, to manage and enforce a tip pool. All of these considerations, both positive and negative, can help you determine if a tip pool is right for your restaurant.

 

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This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.
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