The National Directory of Certified Public Accountants

Ask A CPA - Tip Income Reporting

Employer - Allocating Tip Income - Less Than 8% Calculation Methods

If as the Employer, your total reported tips are less than 8% of total food and beverage sales, then you must allocate additional tip income to the W2 of every tipped employee that reported less than 8% of their respective sales, so that their total reported income reflects this minimum 8% allocation. There are 3 methods of allocating additional employee tips. The gross receipts method, the hours worked method and the good faith agreement. The Gross Receipts method can be used by any restaurant and usually results in a more accurate and fair allocation. It determines the amount that each server should have reported in tips to reach the 8% minimum threshold by comparing the server’s gross receipts as a percentage of the total restaurant receipts. If the server’s actual reported tips are less than the percentage calculated as above then a prorate portion of the total shortfall is allocated to that employees W2. The Hours Worked method applies only to restaurants which employ fewer than 25 full time employees during a payroll period, and it allocates any tip shortfall (below 8% of total sales) by spreading it among underreporting servers based on their percentage of total hours worked as compared to all the other servers. This method is the least accurate as it does not take into account the fact that servers work shifts with different tipping patterns. . The Good Faith Agreement method is rarely used.

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