Drake Accounting® will allow an employee to be tipped directly or indirectly. These options can be selected on the Payroll Options tab under Employees> Employee Setup. An employee can be tipped both directly and indirectly, if applicable.
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Once you have the employee set up as a tipped employee, click Save. Then go to Employees > Payroll > Live or Employees > Payroll > ATF. Select the employee and enter the applicable direct or indirect tips.
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Tips are included in gross pay and taxed in both cases; however, with indirect tipping, the tips are not included in net pay because they were received and held by the employee.
Direct Tips
Direct tipping occurs where an employee receives tips, but gives the tips to the employer who adds them to gross pay to determine taxes and also adds them to Net Pay so they are returned to the employee.
- An example of a direct tip is catering gratuity:
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Enter the amount of direct tips received by the employee that is not included in regular pay. Direct tips are included in the calculation of gross pay and automatically have deductions taken from this amount. The amount is calculated based on the selections of Tipped Directly in the Employee Setup (Employee > Employee Setup > Payroll Options tab > Tipped Employee Fields).
Indirect Tips
Indirect tipping occurs where an employee receives and holds tips, and then reports them to the employer who includes them in the Gross Pay to determine taxes. The tips are not included in Net Pay since the employee already has the tips.
- An example of an indirect tip is when a customer leaves a cash tip:
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- Enter the amount of indirect tips received by the employee that is not included in regular pay. Indirect tips are included in the calculation of gross pay and automatically have deductions taken from this amount. The amount is calculated based on the selections of Tipped Indirectly in the Employee Setup (Employee > Employee Setup > Payroll Options tab > Tipped Employee Fields).
Because indirect tips are NOT included in Net Pay, it is possible for this to result in a zero or negative check balance for the employee.
Allocated Tips
Allocated tips only apply to large food or beverage establishments.
These large food or beverage establishments are located in the 50 states or D.C. The tipping of food or beverage employees by customers is customary, and the employer normally employs more than 10 employees on a typical business day during the preceding calendar year. In other words, if more than 80 employee hours were worked in the establishment on an average day (including all employees of the operation) the food or beverage operation is only considered a large food or beverage establishment if tipping is customary.
- Large food or beverage establishments must report tips received by their employees.
- Owners are required to ensure that the total tip income over a pay period is at least 8% of the establishment's gross receipts from food and drink.
- If the reported tip income falls short of the 8%, employers must reimburse the difference between 8% of overall receipts and actual tip income.
- This reimbursement is referred to as “allocated tips”.
- Allocated tips are reported in box 8 of Form W-2 and are not included in box 1.
Using DOL Rules to Calculate Payroll
If an employee is not marked as a Tipped employee, the Rates & Hours section of the Live or ATF payroll entry screens will not allow the rate to be entered below the state mandated minimum wage. To allow the data entry screen to accept a rate below the minimum wage, the employee will have to be marked as a tipped employee, as described above, or uncheck the Using DOL Rules to Calculate Payroll check box on the Employees> Options screen. See Related Links below for more information.