Tips For You

This blog now is mainly about my rants for Cleveland sports teams and the leagues they play in. However, when I started, I actually addressed other topics. I think I'll try to get back to doing that more often. And what better way then to start out with a controversial issue: tipping.

One of the many controversial issues out there is that of tipping. Should you always tip 15%? Should you ever go below that number? Is tipping directly related to the service you get? What about takeout? Lots of good questions. My purpose isn't to sway you either way with my opinion, but to provide some much-needed information regarding tips. I see a lot of information that isn't entirely correct out there, especially Facebook. I want to help set the record straight.

I've worked in payroll now for seven years and accounting for three. I've worked on different sides of payroll for restaurants. They are one of the more complex industries to do payroll for. There are lots of different rates, overtime, and bonuses. Some are salaried, some are not. Most work with tips, which makes things even more complicated.

In payroll, there is a concept called 'in and out' when it comes to certain items, tips being one of them. Basically, a deduction that falls into this category is something that you receive, are taxed on, and then has been or gets immediately paid out. Items like this would include things like tips, PUCC (personal use of the company car), and advances. In the case of PUCC, you're allowed to use the company car for personal use. You don't receive any cash or anything for it, but there is a monetary value assigned to you using the company car. Let's say it's $200. If you made $300, then you paycheck would look like this:


$300 wages
$200 PUCC


You would get taxed on $500, which for FICA would be $38.25. It would only be $22.95 if you didn't have PUCC.

Tips work the same way. Let's say you made $20 in wages and $500 in tips. Rather than the $1,53 you would pay in taxes on the $20, tips are considered income. Your tax bill for just FICA would be $39.78. Since this is more than the $20 received on the check, you would get a zero net check and your employer would probably withhold the $19.78 out of your tips.

That concept is fairly well-known, but this next one is not. It's called tips to minimum. The federal minimum wage for workers is currently $7.25. The tipped minimum wage is $2.13 but still has to equal the $7.25 per hour when tips are added in. Bottom line, tipped employees should still be making at least $7.25 an hour.

I had an argument with someone in a class in college about this once. She was a server, and the professor had been a server as well. It was in a sociology class. When she brought up the fact that some nights she might only make $3/hour, I told her that was illegal. Both the student and professor argued with me, but they were wrong.

I don't want to do a lot of math here, so let's take an easy example. Let's say you were paid $3/hour as a tipped wage and the state minimum wage is $10/hour. Since the state is higher than the federal, the state minimum is used. Let's say you work 10 hours earning $30 in wages and you only make $170 in tips.

First, because you worked 30 hours, the lowest you can get paid is $300 according to the state minimum wage laws.You only made $30 in wages and $170 in tips totaling $200.

Where does the other $100 come from? Your employer. They are legally obligated to pay you that extra $100. Does it always happen? No, because a lot of tipped employees don't know this. They're letting their employer take advantage of them which isn't right.

No matter how much your hourly wage is, if you're a tipped employee, your hourly wage should work out to be at least the federal minimum wage of $7.25.

There's also a concept called a FICA tip credit that the employer receives on his business tax return. Basically they get a tax credit on tips reported above $5.15 minus wages.

It's very confusing, which is why a lot of restaurants don't actually use this credit. Sip this section if you absolutely hate math. Using our latest example, this is how it would work out:


$170 in tips
$130 in wages
Had the employee been paid $5.15 an hour, they would have been $154.50

$154.50 - $130 = $24.50 difference in wages paid and wages paid out at $5.15

$170 - $24.50 = $145.50 eligible tips for the credit

$145.50 x 7.65% = $11.13 credit for employer


In this case, on his business tax return, the employer would be eligible for a credit worth $11.13. This is just one employee who made a meager $170 in tips. This credit can get very large. It's also more beneficial to the employer if employees get more tips. While they would pay more in FICA taxes up front for payroll, they would get a bigger credit on their tax return.

Look at this recent example, and instead of $170 in tips, make that $570 in tips.

$154.50 - $30 = $124.50 difference in wages paid out and wages paid out at $5.15 (in this case, the employee made enough in tips to not have to pay out that extra $100)

$570 - $124.50 = $445.50 eligible tips for the credit

$445.50 x 7.65% = $34.08 credit for employer


Essentially the employer is recouping the FICA taxes paid out at the time of payroll. While having paid an extra $22.95 in FICA taxes (7.65% of the difference between $600 and $300), he gets an extra $22.95 credit while not having to pay the extra $100 in wages. Your tipping would save the employer an extra $100.

So what's the point of all this? Employers benefit greatly from tips. It allows them to take a large credit on their tax return while not having to pay out most of an employees wage since tips will do that. I don't want to bore you with my own personal opinion on tipping, but when servers say they only make $2.13 an hour, it's simply not true.