Tipped Employees

If an employee's tips combined with the employer's direct wages of at least $2.13 an hour do not equal the minimum hourly wage of $7.25 per hour effective July 24, 2009; the employer must make up the difference.

Servers are required by the IRS to claim every penny earned in tips and to pay taxes on that, which pretty much takes care of the $2.13 hourly wage. Almost every server I know gets a "VOID" paycheck.

Retention of Tips: The law forbids any arrangement between the employer and the tipped employee whereby any part of the tip received becomes the property of the employer. A tip is the sole property of the tipped employee. Where an employer does not strictly observe the tip credit provisions of the Act, no tip credit may be claimed and the employees are entitled to receive the full cash minimum wage, in addition to retaining tips they may\should have received.

Publican 15
You are permitted to establish a system for electronic tip reporting by employees. See Regulations section 31.6053-1(d).
Collecting taxes on tips. You must collect income tax, employee social security tax, and employee Medicare tax on the employee's tips. If an employee reports to you in writing $20 or more of tips in a month, the tips are also subject to FUTA tax.You can collect these taxes from the employee's wages or from other funds he or she makes available. See Tips treated as supplemental wages in section 7 for more information. Stop collecting the employee social security tax when his or her wages and tips for tax year 2010 reach $106,800; collect the income and employee Medicare taxes for the whole year on all wages and tips. You are responsible for the employer social security tax on wages and tips until the wages (including tips) reach the limit. You are responsible for the employer Medicare tax for the whole year on all wages and tips. File Form 941 or Form 944 to report withholding and employment taxes on tips.Ordering rule. If, by the 10th of the month after the month for which you received an employee's report on tips, you do not have enough employee funds available to deduct the employee tax, you no longer have to collect it. If there are not enough funds available, withhold taxes in the following order.1. Withhold on regular wages and other compensation.
2. Withhold social security and Medicare taxes on tips.
3. Withhold income tax on tips.

Summary 5/21/2009--Introduced.
Working for Adequate Gains for Employment in Services Act or WAGES Act - Amends the Fair Labor Standards Act of 1938 (FLSA) to establish a base minimum wage for tipped employees of at least: (1) $3.75 an hour beginning 90 days after the enactment of this Act; (2) $5.00 an hour beginning July 1, 2011; and (3) beginning on July 1, 2012, and adjusted as necessary thereafter, 70% of the wage in effect under FLSA but in no case less than $5.50 an hour.

With Minimum Wage Set to Rise, Tipped Employees Seek Their Share
On Thursday, NELP issued a report documenting what it called "years of neglect" for tipped employees, who have been forced to get by with poverty-level incomes. According to the report, waitresses and waiters -- the largest group of tipped workers -- have nearly three times the poverty rate (14.9 percent) of the workforce as a whole. Tipped workers earn a nationwide median wage of $8.23 per hour, or just $17,118 annually, including tips, according to NELP analysis of the Current Population Survey.

Subminimum Wages for Tipped Employees
The federal tip minimum varied from 40% to 50% of the minimum wage until 1996, when Congress froze it at half of the then-current minimum wage of $4.25 and added the requirement that if an employee’s average tips did not bring the total wage up to the minimum, the employer would make up the difference. The federal tip minimum has remained at $2.13 ever since, even though the federal minimum wage itself has reached $7.25.

IRS requires tipped employees to provide this report once a month, you will need a report for every payroll period, otherwise you cannot correctly report the employee’s total wages, nor can you withhold the proper taxes (and pay your share of FICA tax).

The IRS assumes that all directly tipped employees of a food and beverage establishment should receive tips in the amount of 8% of the establishment’s gross food and beverage receipts. Each year the employer must file Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips. The Instructions for Form 8027 state that if the total reported tips is less than 8% of the gross receipts, the difference must be allocated to the directly tipped employees.

Tipped employees have an obligation to pay income taxes on the tips they receive, so they must try to keep accurate records of tips received. If an employee receives a Form W-2 at the end of the year with allocated tips reported in Box 8, the employee must either add those allocated tips to his reported income, or he can ignore them if he can prove that he reported all of his tips. Thus, good record keeping can save taxes in the long run.