Allocating Tips

If payroll is processed for an establishment with employees who customarily receive tip income, you are required to allocate a calculated tip amount to employees if the tips reported by those employees are less than the specified percentage of the establishment's gross receipts for a given period. Consult your accountant to determine if tip allocation requirements apply to your business.

The default rate for tip allocation is 8 percent. A different rate can be applied if the employer's petition for a different allocation amount has been accepted by the Internal Revenue Service. To use a different calculation percentage, change the value in the Tip Allocation Rate field in Payroll Options.

The allocated tip amount for each employee is calculated based on the gross receipt amount reported for the employee. Earnings code TA must be used to enter the gross receipt amount in Payroll Data Entry.

The allocated tip amount is calculated automatically by multiplying the gross receipt amount by the tip allocation rate. If the calculated amount is greater than the tips reported, the difference is accumulated as allocated tips for the employee. The allocated tip amount is printed on the check stub, along with other earnings information and is for information purposes only. This amount is not included in the check amount, and no tax withholding is based on this amount.

When the Check Register is updated, the allocated tips amount is accumulated for each employee. The year-to-date allocated tips amount is shown on the Benefits tab in Employee Maintenance.

The quarter-to-date and year-to-date taxable tip amounts for earnings code TA can be viewed by clicking the arrow in the top-right corner of the Employee Maintenance window and clicking Tax Summary.

The cumulative year-to-date allocated tip amount is printed in the box labeled Allocated tips on the W-2 Form. The allocated tip amount is printed for information purposes only, and is not included in the wages, tips, and other compensation amount. The allocated tip amount is printed only on the federal copy of the W-2 Form.

For more information, see Tip Reporting Codes.