Wage and Tax FAQs

Please find below some frequently asked questions regarding wages and tips that PayMasterPro receives. These are intended to provide basic information. Each client or customer must check with their own tax expert to ensure they understand the laws to which they need to adhere. PayMasterPro does not take responsibility for providing tax advice and offers these Q&As as guides for its customers.

Q: Are tips considered part of compensation for a tipped employee in calculating minimum wage?
Q: Who is considered a “tipped employee”?
Q: How do overtime rules apply to a “tipped employee”?
Q. How does an employer compute the overtime rate for a worker who has two or more job titles with different hourly rates?

Q: Are tips considered part of compensation for a tipped employee in calculating minimum wage?

A: Yes. The Small Business Job Protection Act of 1996 sets employers’ cash obligation at no less than $2.13 an hour. Tips MAY BE counted toward the remainder of the minimum wage obligation. However, if an employee’s tips combined with the employer’s cash wage of $2.13 an hour do not equal the minimum hourly wage, the employer must make up the difference.

Employers are required to explain the tip credit provisions to their employees in writing, and must explain that all tips received by the employees must be retained by them. If the employer fails to tell employees that part of their tips will be credited toward the minimum wage, the employer will be barred from taking credit for tips and could face a back pay award.

Some states allow a lower tip credit than is permitted under the FLSA. Please contact a local tax expert to find out what specifically applies to your circumstance.

Q: Who is considered a “tipped employee”?

A: A “tipped employee” is one who customarily and regularly receives more than $30 (thirty dollars) per month in tips. An employer cannot assume that an employee is a tipped employee based only on the fact that the or she works in an occupation that traditionally is thought to receive tips or that the employee is part of a group that has a record of receiving more than $30 per month in tips. Each individual employee must qualify. Some exceptions to this rule apply to hostesses, hosts, bus persons and bartenders where they can qualify as tipped employees even when they receive their tips from a tip pool.

Q: How do overtime rules apply to a “tipped employee”?

A: When a tipped employee works overtime, that employee’s regular rate of pay includes the amount of the tip credit taken by the employer. Tips received by the employee in excess of the tip credit will not affect overtime payments because they need not be included in the regular rate.

As with other types of minimum wage employees, the overtime rate for hours worked in excess of 40 hours per week is 1.5 times the minimum wage ($5.15 x 1.5 = $7.725). However the tip credit does not increase for overtime hours. Therefore, the cash wage for overtime hours for tipped employees is $4.705 ($7.725 – $3.02), with $3.02 representing the federal maximum tip credit.

Q. How does an employer compute the overtime rate for a worker who has two or more job titles with different hourly rates?

A: The overtime rate is calculated by using the weighted average method. The total gross wage is divided by the total number of hours worked to obtain the average hourly rate. The average hourly rate is then divided in half to determine the additional premium (half-time) rate due the employee.