Do you think that you tip your employees correctly? Federal laws exist that govern the way that you manage tips for your employees. If you want to avoid making any mistakes, you should know about some of the most common ones.
1. Keeping Tips From Employees
Employers can keep tips, but only under very specific conditions. Regardless of tips paid, employees have to make at least minimum wage after tips are calculated into the mix. If your employees are paid $4 an hour and minimum wage in your state is $7.25, the employees have to be allowed to keep at least $3.25 of their tips.
If employees don't receive $3.25 in tips, you need to make up the difference. Experts have calculated the minimum wage for tip-related positions as lower than average because people assume that tipping will make up for it.
2. Counting Service Charges as Tips
You can't consider service charges tips because the charges are a flat amount and usually go to the business, even if they are pooled in a tipping structure. When you put your charges on the books, you will need to have a separate area for service charges. This impacts your taxes.
3. Deducting Excessive Processing Fees
You are allowed to deduct the credit card processing fees that directly relate to tipping, again if your employee remains above minimum wage. However, you can encounter some significant fines and penalties if you charge too many processing fees.
You need to charge only the amount of fees that directly relate to the employee's own tipping expenditures. You can't charge extra administrative fees. Be careful with your calculations.
4. Rounding Down Rather Than Up
If experts find you underpaying your employees, you could end up paying a significant amount in penalties and additional charges. The law will order you to compensate current and past employees regarding anything that owed to them, which can add up significantly over time.
Due to this, round up rather than down when calculating employee payments and employee tips. If you err at all, you want to err on the side of the employee rather than the side of your business. Ultimately, this will head off any potential issues without costing your business a significant amount.
5. Not Keeping the Right Records
You should keep thorough records of all tips to provide documentation in the event that you end up the target of an investigation. Any employee can launch an investigation through the Department of Labor. Even if the claim isn't valid, you will have to be able to prove that.
Many employers fail to keep thorough records on things like tips because they don't feel they need to. Things like cash tips may flow right through the business and, consequently, a business owner might not think they need to track them.
However, these tips are going to become important if an employee later claims they made below minimum wage. The best solution is to have thorough and complete business processes that log everything.
6. Forgetting to Consider State Laws
Many of the laws regarding tips, such as tipping up to minimum wage, are federal laws that all businesses are required to follow. Many states have their own stricter laws and may have higher minimum wage amounts. You need to follow your state laws and local laws in addition to federal laws.
Your local Department of Labor will have this information.
Many employers make mistakes with tipping, and these mistakes can be very costly. Not only can you experience fines and penalties, but you could also end up alienating your employees or experiencing issues maintaining your business. Avoid these problems to begin with. If you have any questions about your tipping policies, contact Gary A. Isaacs, P.A., for a consultation.