How to Do Payroll for Tipped Employees

Deciding the payroll for employees who receive tips during the course of their duty can be little complex. However, for the convenience of employer, IRS has introduces some regulations regarding the payroll of tipped employees. According to these laws and regulations, the wage rate of employees receiving tips is relatively lower than those who are not benefitted by this facility. This phenomenon is known as tip credit. The tip credit allows employers to pay less hourly rate to their employees and include the amount of tip into their salaries.


  • 1

    While deciding the pay of an employee, the employer should keep in mind that he/she should fulfil the minimum wage requirement set by the government.

  • 2

    Deciding payroll for tipped employees requires expertise in the accounting area, as the employer will have to keep a thorough check on the amount of tips received by a particular employee. To suit his best interest, the employer can calculate the amount of tips on daily basis or on weekly basis. Note that, it is important for an employer to have a sound record of the tips received by a specific employee. For this, he should not standardize the amount of tips received by all employees as this will be biased and unlawful. Having a sound idea of the tips received by a particular employee will assist the employer in accurate calculation of his/her salary.

  • 3

    You must know the minimum wage rate set by the state. While setting the pay of the employee, you should keep the minimum wage requirement in mind. The salary should be greater than or at least equal to the minimum wage requirement. If you are unaware of this requirement, you can visit the IRS website.

  • 4

    After you have calculated the total tips received by an employee in the whole day, you should divide this by the total hours that employee has worked. This will give you his average rate of tips per an hour. For example, if the employee has received $48 as a tip by working 6 hours a day, then you should divide 48 by 6 and the result will be $8 per hour.

  • 5

    Now you should calculate the minimum wage rate per an hour and subtract it from the tips per hour, this will give you the difference. You must pay that difference as the basic salary to your employee to meet the minimum wage requirement.

Leave a Reply

Your email address will not be published. Required fields are marked *

8 − two =