How do I handle payroll for tipped employees?
California is different from most states when it comes to tipped employees. There’s no tip credit here, which means you must pay the full minimum wage regardless of how much your employees earn in tips. As of 2024, that’s $16.00 per hour statewide, though some San Diego employers may be subject to higher local rates depending on their situation.
The first step is setting up your payroll system to track tips as a separate pay type. Credit card tips are easy because they flow through your POS system and you have documentation. Cash tips require your employees to report them to you. The IRS requires employees to report tips totaling $20 or more in a calendar month, typically using Form 4070 or a similar internal tracking sheet.
When you run payroll, you calculate withholding based on wages plus reported tips combined. Federal income tax, Social Security, and Medicare all apply to the full amount. You’re responsible for the employer portion of FICA on tips just like you are on regular wages. This catches some business owners off guard because the tips themselves aren’t coming out of your pocket, but the employer tax obligation still falls on you.
Tip pooling is allowed in California but with restrictions. You can require employees to share tips among workers who provide direct service to customers. Managers and supervisors cannot participate in the tip pool. The rules here are strict and violations lead to penalties, so make sure your policy is clearly documented and legal.
For credit card tips, California law requires you to pay them out by the next regular payday. You can’t hold them for an extended period. Some employers pay credit card tips daily or weekly even if payroll runs biweekly. Whatever method you choose, build it into your payroll setup from the start so the process runs smoothly.
If you’re a larger food or beverage establishment with more than ten employees on a typical business day, you may need to file Form 8027 annually. This form reports tips to the IRS and helps them identify potential underreporting.
The most common mistake is not tracking tips accurately throughout the pay period. When employees underreport cash tips or you don’t have a system for capturing them, your payroll taxes end up wrong. Working with a San Diego bookkeeper familiar with restaurant payroll helps you avoid these issues and keeps your records clean for both tax purposes and labor law compliance.
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