Payroll for Tipped Employees in California: A Guide for Restaurants
Payroll for tipped employees in California involves specific rules that differ from federal tip rules and from payroll for standard hourly staff. Restaurant owners, controllers and office managers need to understand how tip income, minimum wage and payroll taxes interact.
This guide explains how payroll works for tipped employees in California and what restaurant employers should know.
The Short Answer
In California, tipped employees must be paid the full applicable minimum wage — employers generally cannot count tips toward the minimum-wage obligation. Employers must also handle reported tip income for applicable payroll tax purposes. Restaurant owners should confirm tip-reporting requirements with a qualified tax professional.
What Is a Tipped Employee?
A tipped employee is a worker who regularly receives tips from customers as part of their job. In a restaurant, tipped employees commonly include servers, bartenders, and other front-of-house staff who interact directly with customers. Tips are considered the property of the employee who received them, subject to applicable state law.
California Does Not Allow a Tip Credit
Under federal law, employers in some states may pay tipped employees a lower direct wage (a "tip credit") as long as tips make up the difference to reach the federal minimum wage. California does not generally allow employers to use a tip credit against minimum wage. This means California tipped employees must be paid at least the full applicable state or local minimum wage by the employer, in addition to any tips they retain. Source: California DLSE — Tips and Gratuities.
Restaurant owners should not assume that a federal tip credit applies in California. This is one of the most important differences between California and federal tip rules.
Tip Reporting and Payroll Taxes
Employees who receive tips are generally required to report their tip income to their employer. Reported tip income is generally subject to applicable payroll taxes, including Social Security and Medicare taxes, and may be subject to income tax withholding. The employer is responsible for handling payroll tax withholding and reporting based on reported tips.
The specific tip-reporting requirements depend on applicable federal and state rules, including IRS tip-reporting procedures. Employers should consult a qualified tax professional regarding their specific tip-reporting and payroll-tax obligations. Source: IRS — Tip Recordkeeping and Reporting.
Who Owns Tips in California?
California law restricts employer retention of tips. Under California Labor Code Section 351, employers generally may not keep, take, or deduct any part of a tip that is left for an employee. There are limited exceptions, and the rules around tip pooling and tip sharing can be complex. Employers should verify current rules with the California Labor Commissioner. Source: California Labor Code §351.
Overtime for Tipped Employees
Tipped employees are generally entitled to overtime under the same rules as other non-exempt employees. In California, non-exempt employees generally receive overtime for hours worked beyond 8 in a workday or 40 in a workweek, with additional rules for seventh-consecutive-day work. Because California does not allow a tip credit, overtime for tipped employees is calculated based on the employee's regular rate of pay — which includes the full applicable minimum wage — not a reduced tip-credit wage. Source: California DLSE — Overtime.
Why Timekeeping Matters for Tipped Employee Payroll
Accurate timekeeping matters for tipped employees because hours worked drive minimum wage, overtime and recordkeeping. Even though tips supplement a tipped employee's income, the employer must still pay at least the full applicable minimum wage for all hours worked and calculate overtime correctly. Connected time and attendance software helps restaurants capture accurate hours so payroll reflects what employees actually worked.
How Auris Handles Tipped Employee Payroll
Auris provides restaurant payroll services that can incorporate reported tip information within the payroll workflow. Auris can discuss how tip information fits within payroll during a demo. Restaurant owners should confirm their specific tip-reporting requirements with the Auris team and with a qualified tax professional. Auris does not provide tax or legal advice.
Looking for Restaurant Payroll Services?
Auris helps California restaurants manage payroll for hourly and tipped employees with dedicated human support and connected timekeeping.
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