How do I handle payroll for tipped employees?
California requires you to pay tipped employees the full state minimum wage before tips. Unlike federal law and most other states, California doesn’t allow a tip credit. You can’t pay less than minimum wage and make up the difference with tips. Tips are extra income on top of regular wages, not a substitute for them.
Employees must report their tips to you by the 10th of the following month. They’re required to report cash tips if they receive more than $20 in a month. Most employers use Form 4070 or their own internal tracking system. Credit card tips get documented automatically through your payment processor, but cash tips need employee reporting to track properly.
You withhold federal income tax, Social Security, and Medicare from reported tips just like regular wages. If an employee’s wages aren’t enough to cover the full withholding amount, they’ll owe the difference when they file their personal tax return. You’re responsible for the employer portion of FICA taxes on all reported tips, so accurate reporting directly affects your payroll tax obligations.
Credit card tips create a timing consideration. Some employers pay credit card tips on each paycheck while others distribute them daily or at the end of each shift. Either approach works legally, but employees often prefer getting tips quickly. Whatever schedule you choose, apply it consistently and make sure your payroll system handles the timing correctly.
Service charges are different from tips and the distinction matters. A mandatory 18% gratuity added to large parties is a service charge, not a tip. You have more control over how service charges get distributed, but they’re treated as regular wages for payroll tax purposes. Mixing up tips and service charges creates compliance problems that can be expensive to fix.
Tip pooling is allowed in California with restrictions. Back-of-house employees like cooks and dishwashers can participate in tip pools now, but managers and owners cannot take any portion of tips. If you run a tip pool, document exactly how it works and distribute tips fairly according to your written policy.
Keep detailed records of all tips reported, taxes withheld, and how tips were distributed. Your POS system should track credit card tips automatically, but you need a separate system for cash tip reporting. If audited, you’ll need documentation showing you handled everything correctly.
For restaurants and other businesses with tipped employees, setting up payroll correctly from the start prevents expensive corrections later. Most payroll software handles tip tracking, but someone needs to configure it properly and train employees on their reporting responsibilities. Getting Los Angeles bookkeeping services involved early helps you avoid the common mistakes that lead to IRS notices and back taxes.
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