📝 Overview
Cash tips are a meaningful part of many workers' income and must be handled correctly in payroll to stay compliant with tax regulations. This article explains how cash tips and payroll-based tips are treated differently, and what you and your workers can expect to see on pay stubs.
🔑 Tips Paid Through Payroll vs. Cash Tips
The way tips are handled in payroll depends on how the worker received them.
Tips paid through payroll are added as a wage type and taxed the same as regular wages. No additional steps are required on your end beyond including them in the payroll run.
Cash tips are tips a worker receives directly from a customer outside of the payroll system. When a worker receives more than $20 in cash tips in a given month, those tips must be reported and the appropriate taxes must be withheld.
⚠️Important Note: Cash tips are added to payroll as wages and taxed accordingly, but then removed from net pay to prevent the worker from being paid twice for tips they already received in cash.
📊 How Cash Tips Appear on a Pay Stub
When cash tips are included in a payroll run, workers will see the following on their pay stub:
Cash tips: listed as a wage line item; these wages are taxed accordingly
Cash tips already paid: listed as a deduction line item; this offset ensures the worker is not double paid for tips already received in cash
🛠️ Setting Up Cash Tips
If you need to set up cash tips in your payroll, contact DaySmart Support for assistance.
❓ Frequently Asked Questions (FAQs)
Find answers to common questions or additional details that may not be covered in the main instructions.
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What is the $20 threshold for cash tip reporting?
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When a worker receives more than $20 in cash tips in a single month, those tips are considered reportable income. They must be included in payroll so that the appropriate taxes can be withheld. Tips under $20 in a given month are not subject to the same reporting requirement, though workers are still personally responsible for reporting all tip income on their tax returns.
Why do cash tips show up as both a wage and a deduction on a pay stub?
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Cash tips must be added to payroll as wages so that taxes can be withheld correctly. However, since the worker already received that money in cash, it is then removed from their net pay as a deduction labeled "Cash tips already paid." This ensures the worker is not paid twice for the same tips while still having the correct taxes applied.
Are cash tips handled the same way as tips paid through payroll?
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No. Tips paid through payroll are added as a wage type and taxed as regular wages, with no additional offset needed. Cash tips, by contrast, require both a wage line item and a corresponding deduction to account for the fact that the worker already received the funds directly from a customer.
How do I get cash tips set up in payroll?
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Setting up cash tips requires assistance from DaySmart Support. Reach out to the support team and they will walk you through the setup process for your account.