Recognizing total taxable income for tipped employees

Recognizing total taxable income for tipped employees in Minneapolis protects higher server wages and allows table service to continue. This policy incorporates tips and wages restaurant workers receive to make sure all workers meet the $15 minimum wage standard in the city. This allows locally-owned restaurants and bars to continue full table service without disruptive changes to the service model or personnel. 

The employees and the management of restaurants and bars already know the amount of tips made by employees each week for payroll and insurance purposes. By incorporating tips (which are the property of employees) into the calculation of meeting minimum wage standards, restaurant workers can continue to benefit from two forms of income – wages and tips.

It’s simple and easy to administer.

Restaurants and bars already know and report on tips for each pay period. There is no additional work required. Tipped employees also know how much they have earned in tips each pay period. Restaurants and bars know and report how many hours are worked by each employee during each pay period. This information is reported now for unemployment insurance taxes. 

Many restaurants use a payroll service such as ADP or Paycheck, but even those with a manual system will follow these simple steps:

Step 1: Multiply the hours worked by the current minimum wage dollar figure and add reported tips. Divide the total of wages and tips by the hours worked – if the result is over $15 an hour, you’re done.

Step 2: If the result of step one is under $15, multiply the hours worked by the new minimum wage.

Key Facts

  • Minnesota is one of seven states that doesn’t recognize total taxable income for tipped employees.
  • In full service restaurants, servers and bartenders are often the highest paid employees in a restaurant based on the combination of tips and wages.
  • Tips are treated as income for all purposes except the minimum wage. Employees pay payroll taxes on their tips. Employers pay Social Security, Medicare, and unemployment on tips.
  • A survey done by the Minnesota Restaurant Association in 2014 found that statewide, servers’ income averages $18 per hour when factoring in minimum wage and tips. This figure is $22 per hour in the metro area.
  • A higher minimum wage that doesn’t recognize tips will mean fewer hours for employees, higher prices for guests, and an increased challenge for restaurant operations to maintain current operations or grow.