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Pay and report tips

SOLVED•by QuickBooks•172•Updated 1 week ago

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

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.

Allocated tips

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.

Tip Credit

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).

Note that the regulations for tip credits vary per state. To pay tip credits, you can set it up as another hourly rate in QuickBooks.

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.

QuickBooks Online Payroll

Go to Payroll, then Employees (Take me there).
Select your employee.
From Personal Info, select Edit.
In Additional pay types, select Cash Tips or Paycheck Tips.
Select Save.

QuickBooks Desktop Payroll

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

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

Select Lists, then Payroll Item List.
Select the Payroll Item ▼ dropdown, then New.
Select Custom Setup, then Next.
Select Addition, then Next.
Enter the name of the item (for example, Tips In). Select Next.
Select the Expense account where you want to track the item, then Next.
In the Tax tracking type window, select Reported Tips.
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.

Select Lists, then Payroll Item List.
Select the Payroll Item ▼ dropdown, then New.
Select Custom Setup, then Next.
Select Deduction, then Next.
Enter the name of the item (for example, Tips Out). Select Next.
In the Liability Account ▼ dropdown, select the same account you had in the Expense account field for Addition item (tips in). Select Next.
In the Tax tracking type window, select None.
Select Next three times.
Select net pay in the Gross vs. net window.
Select Next, then Finish

Step 3: Report tips on paychecks and payroll forms

QuickBooks Online Payroll

As you run your scheduled payroll, enter an amount for tips.

QuickBooks Desktop Payroll

Run your scheduled or unscheduled payroll. In the paycheck 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.

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