Cash tips are gratuities that are paid to employees in cash, rather than through their paycheck. You enter the reported cash amount so that we can withhold the taxes for these tips when you create paychecks.
Use the Cash tips pay type:
- To track cash tips reported to you by your employee
- For tips charged on credit cards that you pay out to employees in cash (for example at the end of each shift)
Paycheck tips are gratuities that are paid to the employee on their paycheck, rather than in cash.
Use the Paycheck tips pay type if the patron included the tip on a credit card charge and you pay the tip to the employee through their paycheck when you run payroll. We withhold taxes and include Paycheck tips in wages.
After you've set up the types of tips your employees receive, we include these types of pay as choices when you set up employees and create paychecks. We also track both kinds of tips to include on tax forms, such as the federal 941 forms, W-2 forms, and state forms. We report tips subject to Social Security as a separate line item on the federal 941 and W-2.
Here are a few special situations to consider when setting up and paying tips to your employees.
Employee earns less than $20 per month in tips
Tips are not subject to federal payroll taxes (withholding, Social Security, Medicare) until they exceed $20 per month. This means:
- If tips are under $20 on the first paycheck of the month, we don't withhold federal taxes for tips on that paycheck.
- When month-to-date tips exceed $20, we withhold federal taxes on the first $20 as well as on the tip amount above $20.
This applies to both the employee and the employer taxes. State law varies in the treatment of tips under $20. We withhold according to the law in your state.
Taxes or other deductions are higher than the employee's gross pay
Some employees receive a significant portion of their wages as cash tips. Because you must then withhold taxes on these earnings through payroll, the employee’s total withholdings (including other non-tax deductions) may exceed the gross wages you pay through the paycheck. Because the check cannot be for a negative amount, we withhold as much as possible, in the following order:
- All taxes (FIT, Social Security, Medicare, SIT, local and state disability) from regular pay
- Social Security and Medicare on tips
- All other taxes (FIT, SIT, local, and SDI) on tips
- Other non-tax deductions, such as insurance premiums
Any uncollected tax is carried forward to the next paycheck, up until the last payroll of the year.
Reporting uncollected taxes
At the end of Q1, Q2, and Q3 — at the end of any given quarter,if the employee still owes uncollected Social Security and Medicare, this amount is reported on federal Form 941, line 9, as “Other.” You must write a brief note to explain that “Other” is uncollected Social Security and Medicare tax and include the note with your form.
At year-end — If any taxes have not been paid at the end of the year (due to insufficient pay), unpaid Social Security and Medicare taxes are accounted for on these forms:
- Form 941, Line 9 (under "Other")
- Form W-2, Box 12 with code A for uncollected Social Security taxes and code B for uncollected Medicare taxes.
Unpaid tax balances are not carried forward to the following calendar year.