Income tax, social security and Medicare taxes are not withheld on allocated tips. For more information, visit the IRS page for Tip Recordkeeping & Reporting.
Allocated tips are calculated using the Hours Method outlined in Circular E.
- Total Amount to Allocate = Gross Receipts X a % (typically 8%)
- Number of Hours = Regular Hours + (Overtime Hours X Overtime Rate Factor)
- Employee's Share = Total amount to allocate X (Number of hours employee worked/Total hours worked by all employees)
- Employee's Allocation = Employee's share - Reported Tips
Make sure the following steps are completed so tips are calculated correctly:
- Go to Batch Payroll, scroll down to Update Company Files, and select Company Information.
- Switch to the Default Payroll tab and select the box Compute Allocated tips using hours.
- Got to the Main tab > Company Information screen, and enter the Minimum Wage Amount.
- Go to the Employee Information screen, choose an employee, and select Edit Record.
- Make sure the tipped employees are set up as hourly.