Tips are the most-screwed-up line on a restaurant payroll. Get them wrong and you're looking at IRS notices, state DOL letters, and the FICA tip credit you didn't claim. Here's the short version owners actually need.
The 3 buckets of tips
- Cash tips — paid to the server directly.
- Credit card tips — captured at point of sale, paid out via payroll or end-of-shift cash.
- Service charges — mandatory (party of 8+, banquet fee). These are wages, not tips.
Service charges go on the regular wage line, get treated as overtime eligible, and don't qualify for the FICA tip credit. People mix this up all the time.
State by state — the part that matters
- California — no tip credit. You pay full state minimum wage plus the tip. Tip pooling among service staff is allowed; managers can't be in the pool.
- Nevada — no tip credit. Full state minimum wage applies whether the employee gets tips or not.
- Arizona — tip credit up to $3/hr is allowed (cash wage must be at least $11.35/hr in 2026, check your city).
The FICA tip credit (free money most owners miss)
If you pay employer FICA on reported tips above minimum wage, you can claim a federal income tax credit for it. On a server making $20k in tips, that's roughly $1,500/year back per employee. Multiply by your floor. Yes, really.
What you actually need to do every pay period
- Have every tipped employee report tips daily (POS handles credit; a tip sheet handles cash).
- Run reported tips through payroll so employer + employee FICA is paid.
- Flag service charges as wages, not tips.
- File Form 8027 if you have 10+ tipped employees (large food/beverage establishments).
- Claim the FICA tip credit on Form 8846 at tax time.
The audit triggers we see most
- Reported tips suspiciously close to 8% of sales every period — IRS knows that pattern.
- Service charges reported as tips (no FICA paid on them as wages = back taxes + penalty).
- Managers participating in tip pools — a federal violation since the 2018 update.
- Cash tips that never show up on the W-2 — employees get hit, then owners get audited.
We run tipped payroll for restaurants across CA, NV, and AZ — compliant tip pools, FICA tip credit captured, owner pay protected through the Profit First buckets. If your current provider doesn't even mention the FICA credit, that's a sign.
