What Is a Tip Credit?
Tip credits affect minimum wage calculations. They allow an employer to credit some of the employees’ tips toward the employer’s obligation to pay minimum wage in certain industries, usually related to food services or hospitality, in which tips are the bulk of an employee’s earnings. The following states don’t have a tip credit, requiring that employers pay tipped workers the same minimum wage as non-tipped workers: Alaska, California, Minnesota, Montana, Nevada, Oregon and Washington.
What Is a Tipped Employee?
First of all, what are tipped employees? According to the Fair Labor Standards Act (FLSA), tipped employees are described as any employee who regularly receives more than $30 per month in tips. Restaurant servers probably come to mind, but tipped employees also include valet staff, delivery drivers, and bartenders.
Per federal minimum wage laws, employers are required to pay tipped employees a regular wage of at least $2.13 per hour (note that state minimums are sometimes higher). This minimum is based on the assumption tipped employees will earn enough from tips to ensure their minimum hourly wage is at least the minimum wage in effect in their location.
For a complete list of state-to-state minimum wage laws, check out this list from the US Department of Labor.
What Is the Tipped Minimum Wage?
The amount of gratuity that tipped employees earn usually exceeds the minimum wage in effect in their state, so employers are allowed to pay these employees less than the standard minimum as their regular rate. This is called the tipped minimum wage.
What If Employees Don’t Make Enough Tips?
Employers are required to pay tipped employees at least the minimum wage according to the state law if they don't make enough tips in one pay period. Even though tipped employees can legally have a regular hourly rate less than the minimum wage, it is only with the understanding that their tips and wages combined will be equal to or greater than the minimum tip wage in effect.
In this situation, the employer must make up the difference, which Homebase calls Tip Shortage and is automatically calculated in your Homebase payroll run if you have enabled Tip Credits calculations.
How do I enable tip shortage calculation in Homebase?
If you are in an eligible state, under Settings > Payroll you will have a section for tips configurations. The first step is to select to "Automatically supplement pay when employees don't make enough in tips to meet minimum wage":
You will also be required to enter the minimum wage for your location (see Department of Labor).
Enabling tip shortage for employees
Once you have determined the minimum wage for your location, you can enable employees' roles as tipped roles. In doing so, they will have a tip shortage calculated in their payroll runs if the tips they receive are not enough to meet the minimum wage.
To designate an employee role as tipped, check the option "Adjust pay when this employee doesn't make enough in tips in this role to meet the minimum wage" in the Job Details page of the employee’s profile.
In order for tip shortage calculations to apply for a given employee, this setting must be checked in addition to the enablement of tip shortage calculations in the Payroll Settings page.
Tip shortage calculation in the payroll run
Once you are running payroll, employees that have tipped roles will have a tip shortage calculation. This means that if the amount in tips they make is not enough to meet the minimum wage, an additional earning "Tip Shortage" will be automatically added to the payroll
Calculation example: in the picture above, Xander makes the tipped employee minimum wage of $2.13/hr and his company’s location minimum wage is $7.25/hr (configured in the Payroll Settings screen). To match the location minimum wage, Xander needs to make $5.12/hour in tips, or enough tips to bring his total hourly compensation up to the location minimum wage of $7.25/hr.
- Total hours worked: 73.5h
- Tips received: $150 or $2.04/hour
- Tip shortage: ($5.12 - $2.04)/hour * 73.5 hours = $226.32
In this scenario, the employer will provide a supplemental pay of $226.32 so the employee's wage will match the minimum wage. If the employee made more than $376.32 in tips, then there wouldn't be a tip shortage added for them.
The tip shortage is not editable - you don't need to worry about the calculation as Homebase will take care of that for you!
Still have questions? Feel free to reach out and we’d be glad to help!
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