Employee Cash Tips

So is this how that works--

I enter the cash tips as I normally do if they were still employed and had payroll hours and pay.  

Except this way just adds the cash tip amount that they've already taken but haven't paid taxes on yet.

Then the IRS/State will tax them if necessary on the amount I've added in as cash tips but that they haven't paid taxes on yet.

Please see my previous post also.

So neither the employee nor the employer are charged taxes this way?

Hi there, @lydbrewer.

Thanks for providing those extra details. I can share some recommendations for how to handle cash tips for employees who no longer work for you.

In QuickBooks Online, we can only calculate the cash tips for you. For legalities on how to handle the taxes, I recommend consulting your accountant for guidance.

Let me know if you have additional questions about payroll. I'd be happy to help you more. Have a good one.

Any advice on how to do this in QB Desktop Payroll?

I have the same question.  I have unreported cash tips and it won't let me process a "negative paycheck" which is what these instructions are instructing to do.   This is also in Desktop Payroll.

It's great to have you here, @Lesley1

QuickBooks is designed to help you save time and money as a one-stop-shop for small business owners. Allow me to help walk you through reporting your cash tips.

With QuickBooks Desktop you can report two types of tips, Cash Tips and Credit Card Tips. You’ll have to set up these as two separate Payroll items.

If the employee receives the tips in cash, you’ll have to create a payroll item to record a taxable tip amount (Tips In), here’s how:

1. Go to Lists > Payroll Item List.
2. Select Payroll Item > New.
3. Choose Custom Set Up >> select Next.
4. Mark Addition >> click Next.
5. Name the item (for example, Tips In) >> choose Next.
6. Choose the Expense account >> select Next.
7. In the Tax tracking type window, choose Reported Tips. 
8. Click Next >> Next.
9. In the Calculate based on quantity window, choose Neither and select Next.
10. In the Limit Type window, select Finish.

Once completed, you’ll need to set up a Tips Out payroll item to ensure your employees will not be paid for the cash tips again.

Here’s how:

1. Click Lists > choose Payroll Item List.
2. Select Payroll Item > New.
3. Choose Custom Set Up and select Next.
4. Choose Deduction and select Next.
5. Name the item (for example, Tips Out) and select Next.
6. Choose the Liability Account and select Next.
7. In the Tax tracking type window, choose None. Select Next > Next.
8. In the Calculate based on quantity window, choose Neither and select Next.
9. Choose Net Pay and select Next.
10. In the Limit Type window, select Finish.

That's it! You can now add this payroll item in creating your employees paycheck.

Stay in touch with me if you have other questions about reporting your employees cash tips. I'm always here to lend a hand.

I’ve set up payroll but now need to record “after the fact.” Our business is closed for the winter and I’ve already paid the employees' tips in cash during the open season. How can I now record all those tips for each employee so it shows on their W-2?

Hello there, Fabzab.

Thanks for joining the Community. I can help and guide you with the process of recording cash tips in QuickBooks Online.

You’ll have to first add the cash tip as a pay type for your employees. Then, enter the reported cash amount so we can track withhold the appropriate taxes.

This is to ensure you comply with the federal and state requirements for reporting and paying taxes on tip income. You can refer to the Cash tips article for detailed instructions.

Once done, you're able to create paychecks and add the cash tips amount. I’ll walk you through the steps.

Here’s how:

1. Go to Workers on the left panel.
2. Click Run payroll at the top right corner of the screen.
3. Select the Bank account and Pay period, then enter the Pay date and make sure the check date is 2018.
4. Choose the employees you’re working on.
5. Enter the amount in the Cash Tips box.
6. Click Preview payroll.
7. Once you're ready, you can Submit payroll.

With these steps, the tips should now be reported on your employees' W-2s

Please let me know if you have any further clarifications. I'll be right here to help you further. Stay safe!

Your instructions do not address the issue of a negative net pay check.  

Hello LJP415,

Negative paychecks can happen when you report the tips in and out of an employee. However, you won't be able to save a paycheck with a negative amount. I'll give a sample scenario and how we fix it.

An employee received a tip from a customer worth $100. This is a taxable amount, however, the employee received it in full. Before we create the transaction, let's set up the necessary payroll items:

• Tips In - a taxable Addition item
• Tips Out - a non-taxable Deduction item
• Employee Advance (Loan) - a non-taxable Addition item

Here's how to create the Tips In:

1. Click Lists at the top menu and select Payroll Item List.
2. Click the Payroll Item button and select New.
3. Select Custom Setup and click Next.
4. Select Addition under Payroll item type and click Next.
5. Enter the name of the item and click Next.
6. Select an Expense account and click Next.
7. Select Reported Tips under Tax tracking type.
8. Click Next until you reach the Finish button.

Here's how to create Tips Out:

1. Follow Steps 1-3 of Tips In.
2. Select Deduction under Payroll item type and click Next.
3. Enter the name of the item and click Next.
4. Enter the Agency for employee-paid liability details and click Next.
5. Select None under Tax tracking type.
6. Click Next until you reach the Finish button.

Here's how to create an Employee Advance or Loan:

1. Follow Steps 1-5 of Tips In.
2. Select None under Tax tracking type.
3. Click Next until you reach the Finish button.

Now, we'll need to ensure the Net amount of the paycheck is $0.00 when using the three payroll items. You can check out the screenshot to see how I added the items.

Then, you can deduct the employee loan amount to the next payroll.

That's how we do it in QuickBooks Desktop. You can try this, too.

OK, I have set up tips as recommended but I dont know how to get this shortfall to be reported on 941 or W-2. Is this something that I need to manually override to take the company out of the equation?

I have a client that is a bar and the bartenders can not wrap their brains around the fact that they owe tax back to the company and have "consulted attorneys" (ok, go ahead). I dont want to be part of this fight and want to put it on the W-2 in box 12 with codes A and B, but I dont know the mechanics for doing this through QB desktop for 941 or W2.

They almost NEVER have enough in their checks to cover taxes. Please help, these bartenders are driving me nuts.

Jen Baca

Thanks for joining in this conversation, @PhillipsandBaca. 

As an additional insight, cash tips that are paid to employees in cash rather than through paycheck need to be entered so you can withhold the taxes for these tips. 

While paycheck tips, we withhold the taxes and include the paycheck tips in wages when you use the Paycheck tips pay type through their paycheck. 

It's reported on federal forms:

• 941: Boxes 2, 5b, 5c
• 940: Box 3
• W-2: Boxes 1,5,7

Here's an article that explains more about this topic: Tips and paychecks. 

You can also check out this article to learn more about how to enter these tips on employee paychecks in QuickBooks Desktop: Report tips in and out on employee paychecks in QuickBooks Desktop Payroll. 

Feel free to message here again if you have additional concerns. We're always around to help in any way we can. 

uh oh - I've been just adding the cash tips paid out to the employee's w/2 at the end of the year.  They know taxes haven't been taken out and will resolve when they file.  

Does it HAVE to be reported on 940 & 941 too somehow?  yikes!

Thanks for your help

Thanks for reaching out to us, @SandraM.

All cash and non-cash tips received by an employee are income and are subject to Federal income taxes. This means that it also needs to be reported to the 941 and W-2 forms, not on 940.

940 form is used to report FUTA taxes, which only employers pay, not employees. Therefore, tips are not to be reported there.

For more information about tips, see these links:

• Tip Recordkeeping & Reporting
• Tips IRS

Reach out to me again if you need further assistance with setting up tips in QuickBooks Desktop Payroll. I'll be more than happy to share more insights with you.