Allocating Tips in Payroll – How and Why?

This posting steps through the tip allocation computation used by the Payroll module in Dynamics GP. Some questions have come up lately on the forums; rather than posting a lengthy answer, I thought it would be better to cover it in more detail in my blog.

What is it? -- The IRS has set a minimum amount that it expects waitstaff should have included in income for tips. The tip allocation calculation function merely adds an amount to taxable income; it does NOT result in an extra amount going into the paycheck.

The amount includable in income for an employee who is directly tipped is the greater of (a) the amount they reported to their employer or (b) their allocable share of the minimum amount established by the IRS (for 2009 it was 8%).

An indirectly tipped employee does not receive allocated tips. Generally, indirectly tipped employees receive their tips from other tipped employees rather than directly from the customers. Positions such as cooks, bussers, hostesses, barbacks, and dishwashers are typically indirectly tipped employees. Of course, an employee could receive both direct and indirect tips, if so they will be included in the allocation computation for their direct tips.

The Dynamics GP instructions provide the following explanation about allocated tips:

Microsoft Dynamics GP uses the Gross
Receipts method that is calculated per pay
run. The allocated tips amount equals the
difference between tips received and
employee gross receipts divided by
company gross receipts, multiplied by the
tip allocation rate, provided the difference is
more. Made to each directly tipped
employee.

Reading it again won’t help. I think an example is in order.

Our Example -- Let’s say our company, named Tailspin Pizza (“Tailspin”), has three employees who receive tips. The employees are tipped both directly and indirectly

During a payroll period, gross receipts at Tailspin were $15,500. Total tips reported by employees for this period were $980. Directly tipped employees reported $430 and indirectly tipped employees reported $550. Based on the IRS guidelines, the employees’ total tips should have been 8% of $15,500, or $1,240. Our job is to properly calculate and allocate the $260 shortfall.

Dynamics GP can do it!

How to set it up in Payroll -- Payroll Options need to be set telling the system that you want to use the tip allocation feature. To do this:

1. Navigate to the Payroll Setup window

Microsoft Dynamics GP>>Tools>>Setup>>Payroll>>Payroll

2. Select the Options button on the lower right-hand corner of the Payroll Setup window.

3. Mark the Calculate Tip Allocation checkbox in the Options section of the Payroll Setup Options window and set the Tip Allocation Rate to 8.00% (or whatever applicable percentage).

The allocation rate is determined by the IRS. Unless a lower amount was negotiated with the IRS, the rate was 8.00% for 2009.

How to set up Pay Codes --The appropriate pay codes need to be set up in order to include tips in a payroll run. Additionally, we need to be able to indicate whether the tips were received directly or indirectly. For the purposes of the tip allocation computation it does not matter whether the tips were ‘charged’ or ‘reported’. We’ll set up the following 3 Pay Codes to use in our example:

Pay Code	Pay Type	Tips Received
CTIPI	Charged Tips	Indirectly
CTIPD	Charged Tips	Directly
RTIPD	Reported Tips	Directly

For the payroll period, Tailspin has total gross receipts of $15,500. Total gross receipts are calculated by adding together the individual employee receipts entered on the payroll transaction. The employee’s receipts are entered on the Payroll Transaction Entry window with the ‘show’ details open.

The Calculation -- Total gross receipts were $15,500, total reported tips were $980. Tips received directly were reported as $430. Tips received indirectly were reported as $550.

Directly Tipped Employees	Gross Receipts for payroll period	Direct Tips Reported
ACKE	3,500	30
BARB	5,500	100
BARR	6,500	300
Totals	15,500	430

1. $15,500(gross receipts) x .08 = $1,240

2. $1,240 - $550 (tips reported by indirectly tipped workers) = $690

The amount used to calculate each directly tipped employee’s share of 8% of the gross is $690.

3. Calculate each directly tipped employee’s share of 8% of gross receipts.

Directly Tipped Employees	Directly Tipped Share of 8% of the gross	(Times) Gross Receipts Ratio	Employee’s share of 8% of the gross
ACKE	690	3,500/15,500=	156
BARB	690	5,500/15,500=	245
BARR	690	6,500/15,500=	289
		Total	690

4. Calculate the shortfall in reported directly received tips

Directly Tipped Employees	Employee’s share of 8% of the gross	(Minus) Tips Reported	Employee shortfall (use 0 if no shortfall)
ACKE	156	30	126
BARB	245	100	145
BARR	289	300	-
Total	690	430	271

5. Calculate the allocable share of the total tip shortfall. $1,240(total gross receipts x 8%) less $980 (total tips reported, includes direct and indirect) = $260(amount to be allocated among employees who had a shortfall).

Shortfall Employees	Allocable Amount	(Times) Shortfall ratio	Amount of allocation
ACKE	260	126/271=.46484	120.86
BARB	260	145/271=.53516	139.14
BARR	260	0/271=.00000	0
Total			260.00

6. Since employee BARR did not have a shortfall, there is no allocated amount to employee BARR.

Leave it to the IRS to dream up this ‘simple’ allocation calculation. Fortunately Dynamics GP does it for us!

Until next post!

Leslie