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Working with Tip Credit

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Overview

In the majority of scenarios involving employees in traditionally tipped positions (which is defined as making more than $30 a month in tips), employers are permitted to claim a tip credit. This tip credit legally allows employers to pay their tipped employees an hourly cash wage lower than the minimum wage requirement by including tips or gratuities as part of their obligation to pay minimum wage. However, in the case that the supplemental tips still don’t meet the minimum wage requirement for employees, employers must also pay an additional earning called a tip credit adjustment to minimum wage to ensure that minimum wage is being met. The total tip credit taken by the employer is derived from the amount of tips an employee has earned on top of their lower cash wage up until their minimum wage requirement is satisfied. Employers in the service industry (particularly restaurants) commonly use this payroll workflow to pay their tipped employees.

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In certain states, employee paystubs are required by law to display the hourly cash wages, tip credit taken, and tip credit adjustments.

The Check API provides an earning type called tip_credit_adjustment_to_minimum_wage to allow partners to properly enter in wages for tip credit workflows. Tip credit payroll items can be entered into the Check API using the tip_credit_adjustment_to_minimum_wage earning type and the accompanying tip_credit_amount field. Both cash_tips and paycheck_tips will be considered as the tip earning types that will supplement the hourly cash wage for a tipped employee to meet minimum wage.

We’ve provided some common scenarios of earnings on a payroll item for a tipped employee and how it’s represented in the Check API. Assume that for each of the following scenarios an employee has worked 30 hours a week and earned an hourly cash wage of $2.13/hr (the federal minimum) from their employer. They have also earned a varying amount of tips, and their employer has a legal minimum wage obligation of $7.25/hr (federal minimum) after tips and adjustments:

Values for all Scenarios:

  • Total hourly earnings for each scenario: $2.13 x 30 hrs = $63.90
  • Total minimum wage obligation for each scenario: $7.25 x 30 hrs = $217.50
  • Max possible tip credit: $217.50 - $63.90 = $153.60

Scenario 1: Tips + hourly cash wage exceeds minimum wage

  • Additional Tips made: $210 total / 30 hrs = $7/hr
  • Total tip credit: $153.60 (note: the max tip credit ($153.60) is used when tips and hourly cash wage exceed or meet minimum wage)
  • Tip credit hourly: $153.60 / 30 hrs = $5.12/hr
  • Tip credit adjustment: $217.50 - $153.60 (tip credit) - $63.90 (cash wage) = 0
  • Employee total hourly rate: $2.13/hr + $7/hr = $9.13/hr
{
  
       "employee": "emp_zGGp6wYcxAeu1Ng8IA7v",
       "earnings": [
            {
               "type": "hourly",
               "amount": "63.90",
               "hours": 30,
               "workplace": "wrk_9tb1CAiAu6fwNKxwxbcA"
           },
           {
               "type": "cash_tips",
               "amount": "210.00",
               "workplace": "wrk_9tb1CAiAu6fwNKxwxbcA"
           },
           {
               "type": "tip_credit_adjustment_to_minimum_wage",
               "amount": "0.00",
               "tip_credit_amount": "153.60",
               "hours": 30,
               "workplace": "wrk_9tb1CAiAu6fwNKxwxbcA"
           }
      ],
}

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In order to ensure the tip credit is properly displayed on the paystub and remains fully compliant, even if the adjustment is $0, the tip_credit_adjustment_to_minimum_wage should still be entered as a separate earning with the correct tip_credit_amount

Scenario 2: Tips + hourly cash wage meets minimum wage

  • Additional Tips made: $70 + $83.60 = $153.60 total / 30 hrs = $5.12/hr
  • Total tip credit: $153.60
  • Tip credit hourly: $153.60 / 30 hrs = $5.12/hr
  • Tip credit adjustment: $217.50 - $153.60 (tip credit) - $63.90 (cash wage) = 0
  • Employee total hourly rate: $2.13/hr + $5.12/hr = $7.25/hr 
{
      
       "employee": "emp_zGGp6wYcxAeu1Ng8IA7v",
       "earnings": [
            {
               "type": "hourly",
               "amount": "63.90",
               "hours": 30,
               "workplace": "wrk_9tb1CAiAu6fwNKxwxbcA"
           },
           {
               "type": "cash_tips",
               "amount": "70.00",
               "workplace": "wrk_9tb1CAiAu6fwNKxwxbcA"
           },
           {
               "type": "paycheck_tips",
               "amount": "83.60",
               "workplace": "wrk_9tb1CAiAu6fwNKxwxbcA"
           },
           {
               "type": "tip_credit_adjustment_to_minimum_wage",
               "amount": "0",
               "tip_credit_amount": "153.60",
               "hours": 30,
               "workplace": "wrk_9tb1CAiAu6fwNKxwxbcA"
           }
      ],
}

Scenario 3: Tips + hourly cash wage fail to meet minimum wage

  • Additional Tips made: $120 / 30 hrs = $4/hr
  • Total tip credit: $120
  • Tip credit hourly: $120 / 30 hrs = $4/hr
  • Tip credit adjustment: $217.50 - $120 - $63.90 = $33.60
  • Tip credit adjustment hourly: $33.60 / 30 hrs = $1.12/hr
  • Employee total rate: $2.13/hr + $4/hr + $1.12/hr = $7.25/hr (Minimum wage is met with adjustment) 
{
      
       "employee": "emp_zGGp6wYcxAeu1Ng8IA7v",
       "earnings": [
            {
               "type": "hourly",
               "amount": "63.90",
               "hours": 30,
               "workplace": "wrk_9tb1CAiAu6fwNKxwxbcA"
           },
           {
               "type": "cash_tips",
               "amount": "120.00",
               "workplace": "wrk_9tb1CAiAu6fwNKxwxbcA"
           },
           {
               "type": "tip_credit_adjustment_to_minimum_wage",
               "amount": "33.60",
               "tip_credit_amount": "120.00",
               "hours": 30,
               "workplace": "wrk_9tb1CAiAu6fwNKxwxbcA"
           }
      ],
}

Note that in all scenarios, the employee has fulfilled the minimum wage requirement through tips and tip credit adjustments, and that in scenarios 1 and 2, no tip adjustments were needed since tips earned had either met or exceeded the minimum wage requirement

Overtime

In the case of overtime, by law, the tip credit amount per hour cannot be increased for the premium rate for overtime. Therefore calculating tip credit and adjustment should be the same for overtime hours.

Assume for the following scenarios that an employee has worked 45 hours (40 hours regular and 5 hours overtime) with the same federal minimum requirements as above and a 1.5x premium overtime rate, resulting in a $10.88/hr minimum overtime wage.

Values for all Overtime Scenarios:

  • Proposed overtime rate: 1.5x regular pay
  • Minimum wage requirement assumption for overtime: $7.25/hr x 1.5 = $10.88/hr
  • Regular minimum wage requirement: $7.25 x 40 hrs = $290
  • Overtime minimum wage requirement: $10.88 x 5 hrs = $54.40
  • Overtime cash wage requirement: $10.88 - $5.12 = $5.76
  • Max tip credit possible: ($290 - ($2.13 x 40 hrs)) + ($54.40 - ($5.76 x 5 hrs)) = $230.40

Scenario 4: Hourly and cash tips cover minimum wage with overtime hours

  • Additional Tips made: $235 / 45 hrs = $5.20/hr
  • Total tip credit: $230.40
  • Tip credit hourly: $230.40 / 45 hrs = $5.12/hr
  • Tip credit adjustment with overtime: ($290 + 54.20) - ($2.13 x 40 hrs) - ($5.76 x 5hrs) - $230.40 = 0 
{
     "employee": "emp_zGGp6wYcxAeu1Ng8IA7v",
     "earnings": [
          {
               "type": "hourly",
               "amount": "85.20",
               "hours": 40,
               "workplace": "wrk_9tb1CAiAu6fwNKxwxbcA"
          },
          {
              "type": "overtime",
              "amount": "28.80",
              "hours": 5,
              "workplace": "wrk_9tb1CAiAu6fwNKxwxbcA"
          },
          {
              "type": "cash_tips",
              "amount": "235.00",
              "workplace": "wrk_9tb1CAiAu6fwNKxwxbcA"
          },
          {
              "type": "tip_credit_adjustment_to_minimum_wage",
              "amount": "0",
              "tip_credit_amount": "230.40",
              "hours": 45,
              "workplace": "wrk_9tb1CAiAu6fwNKxwxbcA"
          }
    ],      
}

Scenario 5: Hourly and cash tips do not cover minimum wage

  • Additional Tips made: $180 / 45 hrs = $4/hr
  • Total tip credit: $180
  • Tip credit hourly: $180 / 45 hrs = $4/hr
  • Tip credit adjustment with overtime: ($290 + 54.20) - ($2.13 x 40 hrs) - ($5.76 x 5 hrs) - $180 = $50.40
  • Tip credit adjustment hourly: $180 / 45 hrs = $1.12/hr
{
          
    "employee": "emp_zGGp6wYcxAeu1Ng8IA7v",
    "earnings": [
         {
              "type": "hourly",
              "amount": "85.20",
              "hours": 40,
              "workplace": "wrk_9tb1CAiAu6fwNKxwxbcA"
         },
         {
              "type": "overtime",
              "amount": "28.80",
              "hours": 5,
              "workplace": "wrk_9tb1CAiAu6fwNKxwxbcA"
         },
         {
              "type": "cash_tips",
              "amount": "180.00",
              "workplace": "wrk_9tb1CAiAu6fwNKxwxbcA"
         },
         {
              "type": "tip_credit_adjustment_to_minimum_wage",
              "amount": "50.40",
              "tip_credit_amount": "180.00",
              "hours": 45,
              "workplace": "wrk_9tb1CAiAu6fwNKxwxbcA"
         }      
     ]
}

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Note that the tip credit adjustment for overtime and regular hours will end up being calculated together

Ensuring correct tip credit entry:

In order to make sure that tip credits are being entered correctly into the Check API, it is critical to know the minimum wage requirements for each state and region. The Department of labor has a table that lists all these minimum wage requirements for tipped employees. There are also many states listed that no longer allow employers to take tip credits.

Updated about 2 years ago