Learn how to report your employee’s earned tips in QuickBooks Online Payroll and QuickBooks Desktop Payroll for tax purposes.
If your employees received tips from customers, you’re required to track and withhold taxes from those tips. If the tip is less than $20 per month, tips aren’t subject to federal taxes. Visit the IRS website to learn more.
Follow the steps below to report tips on paychecks and payroll forms.
Step 1: Determine what type of tips your employees received
Cash tips are tips your employees receive directly from customers in cash, not through a paycheck. 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.
Paycheck tips or Credit Card tips
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 paychecks 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 W-2 forms.
Fair Labor 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 2: Set up a payroll item for tips in QuickBooks
|Note: Not sure which payroll service you have? Here's how to find your payroll service.