Pay and report tips

Cash tips are tips your employees receive directly from customers in cash, not through a paycheque. Tips given through credit card charges converted to cash are also considered Cash tips.

These tips are taxed, but shouldn’t be included in employees’ net pay, as they've already received it.

These tips are mostly received through credit or debit card charges, gift cards, or any other electronic payments. You can give these tips to your employees through their paycheques along with their regular pay.

If you pay out allocated tips to your employees during the year, contact us at year end to make sure the tips are reported correctly on T4 forms.

Fair Labour Standards Act (FLSA) Section 3(m) permits an employer to take a tip credit toward its minimum wage obligation for tipped employees equal to the difference between the required cash wage (which must be at least $2.13) and the federal minimum wage. Thus, the maximum tip credit that an employer can currently claim under the FLSA is $5.12 per hour (the minimum wage of $7.25 minus the minimum required cash wage of $2.13).

Step 1: Create an additional payroll item for taxable tip amount

Use this payroll item to report all the tips the employee received.

1. Select Lists, then Payroll Item List.
2. Select the Payroll Item ▼ dropdown, then New.
3. Select Addition, then Next.
4. Enter the name of the item (for example, Tips In). Select Next.
5. Select the account where you want to track the item, then Next twice.
6. In the Tax tracking type window, select Reported Tips. 
7. Select Next three times, then Finish.

Step 2: Create a payroll deduction item for tips kept by the employee

Use this payroll item to take away the tips that the employee already received.

1. Select Lists, then Payroll Item List.
2. Select the Payroll Item ▼ dropdown, then New.
3. Select Deduction, then Next.
4. Enter the name of the item (for example, Tips Out). Select Next.
5. In the Liability Account ▼ dropdown, select the same account you had in the Expense account field for Addition item (tips in). Select Next.
6. In the Tax tracking type window, select None. 
7. Select Next twice.
8. Select net pay in the Gross vs. net window. 
9. Select Next, then Finish.

Run your scheduled or unscheduled payroll. In the paycheque detail, add the Addition item and the amount under the Other Payroll Items section.

If the employee receives the tips in cash, you need to enter the deduction item in the Other Payroll Items section. This is to take the amount out so they don’t get paid for the cash tips again.