Many careers rely on tips for income; tipping for almost everything is now mainstream in American culture. You may have a job where tips constitute a significant portion of your overall income. Is working for tips wise or desirable? The Crone Law Firm focuses exclusively on employment law matters like working for tips, how to handle your wage calculations, and more. Here are some basics workers who rely on tips for income should know.
Defining Tipped Employees
“A tipped employee engages in an occupation in which he or she customarily and regularly receives more than $30 per month in tips.” A tipped employee’s wage calculations should produce direct wages that at least equal the federal minimum wage. Some states require higher direct wage amounts for tipped workers.
Employers May Legally Pay Less Per Hour to Tipped Employees
In most states, employers may pay tipped employees as little as $2.13 per hour as long as the employee receives enough tips to make at least the federal minimum wage of $7.25 per hour. In other words, your tips must average at least $5.12 per hour. If your tips and direct wages combined do not equal the federal minimum wage, your employer must make up the difference in your direct pay. Seven states require tipped employees to be paid the state’s regular minimum wage before tips. When a state law differs from the federal minimum wage law, the employer must comply with the standard most protective to employees.
Service Charges Are Not Tips
Many businesses add a compulsory service charge to help defray certain costs of doing business. Many customers misunderstand this charge and think it is a mandatory tip. FLSA provisions do not consider this charge a tip. Employees receiving a portion of mandatory service charges can count this toward their total wage and overtime pay calculations. This is completely different from businesses that require a mandatory tip amount added to the bill for certain situations, such as “a 15% tip will be added to all parties numbering six or more persons.” An employee’s portion of this tip should be counted in their regular tip calculations.
Tips and Credit Card Fees
More people now conduct transactions with debit or credit cards and write in a tip to be added to the total. However, businesses typically incur a 3% fee for credit transactions. Because of this, employers are allowed to recoup part of your tips that apply to this fee. For example, if the employer pays a 3% transaction fee when a customer pays with credit, and the customer tipped you $1, your employer can actually only pay you $0.97.
Employers May Not Keep or Share Your Tips
The FLSA prohibits employers from keeping any portion of employees’ tips for any purpose, including tip-sharing arrangements. The FLSA also defines management personnel and others who may not share your tips. Owners, managers, or supervisors may keep tips they receive for their own personal service. For example, a restaurant owner may directly serve customers by delivering their food or making drinks and receive a tip for their service; they may keep these tips.
IRS Tax Reporting for Tips
According to the IRS, tips include any of the following compensation:
- Cash tips received directly from customers.
- Tips from customers who leave a tip through electronic settlement or payment. This includes a credit card, debit card, gift card, or other electronic payment method.
- The value of any noncash tips, such as tickets or other items of value.
- Tip amounts received from other employees paid out through tip pools, tip splitting, or other formal/informal tip-sharing arrangements.
All cash and non-cash tips received by an employee from a single employer totaling $30 in one calendar month are income and are subject to Federal income taxes. All cash tips received by an employee in any calendar month are subject to Social Security and Medicare taxes and must be reported to the employer.
Know Your Employment Rights
Tipped employees can encounter complex and conflicting situations that make wage calculations difficult. The Crone Law Firm has offices in Memphis, TN, St. Louis, MO, and near Chicago, IL, when you need help with employment law matters like working for tips. Contact us by phone or online today to schedule a free case review when you believe your employer is incorrectly handling your pay that includes tips.