Appendix E - Taxable Tip Reporting

 

Overview

For businesses responsible for reporting taxable tips, such as restaurants, the Payroll module must be set up to allow calculation of taxes on both regular wages and the tip portion of employee earnings. When set up in the proper manner, the Payroll module will automatically generate regular earnings and employer-allocated tips, calculate taxes on both types of earnings, and automatically deduct the tip portion of earnings after taxes are calculated but before checks are printed.

Total Code Definition

Total codes must be established for accumulating both regular wages and wages earned in tips for reporting to the appropriate government tax jurisdictions. As a minimum, total codes for Gross Earnings and for Taxable Tips must be defined. Some states also may require the establishment of additional total codes for state, city and/or local taxes for collecting taxes on tips (refer to the State and Local Tax Guides).

Pay Code Definition

When establishing pay codes, at least two separate pay codes must be established for reporting taxable tip earnings and regular pay (e. g., TT for taxable tips, RP for regular pay). For taxable tips, select Y in the Units field so that a standard or manually entered number of hours is multiplied by the rate specified for taxable tips during payroll entry. Then select Y in the Auto Deduct field to allow a corresponding amount to be automatically deducted from earnings before the pre-check register and payroll checks are printed.

 

Both the RP pay code for regular pay and the TT pay code for taxable tips must each include the total code for Gross Earnings (and any applicable state or local codes). The TT pay code must also include a total code for accumulating taxable tip amounts.

Deduction Code Definition

Define a deduction code of TT (its name must be identical to the taxable tip pay code, whatever that may be). This deduction will automatically reduce gross earnings by an amount equal to the taxable tips after taxes on the gross earnings and tips are calculated and before the pre-check register and employee checks are printed. Enter D (dollars) in the Deduct Type field, since the deduction amount is based on taxable tip earnings.

 

Enter the total code established for taxable tips in the Total Code field. In the Deduction Rate field, enter 100.00 percent. This will always create a deduction that is 100% of the total taxable tips amount.

Title Code Definition

In the Title Code Maintenance task, define the appropriate title ID codes for all employees who receive regular and tip earnings (e.g., waiters, waitresses, busboys, hostesses, etc.), and enter a standard pay rate for each title when applicable. Define an additional title ID code for taxable tips, entering zero in the Standard Rate field.

 

In the Pay Rate Maintenance task, enter the appropriate title ID code for each employee followed by the pay rate and number of hours the employee normally works (e.g., a waiter at 6.00 per hour for 40 hours per week).

Make a separate entry using the title ID code established for taxable tips. Enter the appropriate tip amount and hours in the Rate and Hours fields, using a percentage of regular pay as the pay rate for tips (or any other method that is convenient). For example, When 15 percent of employee earnings is regularly allocated as tips, enter 15 percent of the employee’s regular pay in the Rate field and the normal hours worked in the Hours field (e.g., for the Waiter title previously noted, enter a Rate of .75 and Hours of 40). This allows the taxable tips amount to be automatically calculated and displayed during payroll entry (e.g., the rate of .75 is multiplied by 40 hours to calculate $30.00 in taxable tips).Payroll ProcessingEach payroll period, enter the appropriate pay periods (Weekly, Biweekly, etc.) and deduction periods (1, 2, 3 etc.), and select Y to the Automatic Processing option so that all earnings for regular pay are automatically generated for employees who are assigned to the specified pay period(s). When an employee has worked fewer hours or more hours than normal, use the Payroll Entry task to make any necessary adjustments to regular pay. The taxable tips earning amounts must also be entered through Payroll Entry.

During the Payroll Calculation process, taxes will automatically calculate for both regular pay and taxable tips. Following the tax calculations, the taxable tips amount is automatically deducted using the deduction code established for taxable tips. The net check amount is the total of all regular pay, minus applicable federal, state, and/or local taxes on both the regular pay and taxable tips earnings. Taxable tips are printed on employee pay check stubs as both a pay code and as a deduction code, and are accumulated in the taxable tips pay code to be printed in the Allocated Tips box on employee W-2 forms.