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Manage tip credits on your employees' paychecks

Learn how to manage your employees' tip credits with payroll.

If you take advantage of the tip credit, you’ll need to make sure you’re meeting minimum wage requirements each time you run payroll.

Note: If you’re not sure talk to your accountant or see these guidelines for the state you’re in. Some states follow the Federal wage and hour minimums and other states have their own legislated minimum wage which is higher than the federal rule.

Step 1: Double check the hourly rate each pay period

If you are taking advantage of the tip credit hourly wage, you’ll calculate their hourly rate for each payroll period. Use the formula below to determine if they have earned enough in tip income to bring their hourly wage up to the mandated minimum wage for your state, county or city.

Here’s how you determine employees hourly rate:

  1. Multiply their Tip credit wage rate by hours worked in the pay period
  2. Take the amount they earned in tips and add it to the amount from step 1
  3. Divide total in step 2 by hours worked in the pay period
(( wage rate X hours work in the pay period) + Tips) \ hours worked in pay period = hourly rate

If the employee hourly rate in this pay period does not meet the legislated minimum wage, you need to make up the difference.

Step 2: Update the hourly rate in payroll each pay period

If your employee hourly rates with tips include don’t meet the mandated state minimum wage, you’ll need to modify their hourly rate.

This content is for information purposes only and information provided should not be considered legal, accounting or tax advice or a substitute for obtaining such advice specific to your business. Additional information and exceptions may apply. Applicable laws may vary by state or locality. No assurance is given that the information is comprehensive in its coverage or that it is suitable in dealing with a customer’s particular situation. Intuit Inc. does it have any responsibility for updating or revising any information presented herein. Accordingly, the information provided  should not be relied upon as a substitute for independent research. Intuit Inc. cannot warrant that the material contained herein will continue to be accurate, nor that it is completely free of errors when published. Readers should verify statements before relying on them.

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