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    Create an allocated tips payroll item

    Article ID: 1000705

    Overview

    Allocated Tips are tips that an employer assigns to employees in addition to the tips that the employees report for the year. The gross receipts are used to calculate the allocated tip amount.

    Allocated tips are used if the employee worked in a restaurant, lounge, or similar businesses (that must allocate tips) and the tips that are reported by the employee are less than the employee's share of 8% of food and drink sales.

    If the total of all employees reported tips are more than 8% of sales, no tip allocation is required. However, the employer must file Form 8027 Employer's Annual Information Return of Tip Income and Allocated Tips. Customers are responsible for the completion and filing of this form.

    Allocated Tips appear in Box 8 of the employee's W-2.

    Expected Outcome

    An allocated tips payroll item will be created you can add to paychecks.

    Assumptions

    You have added an employee you want to pay allocated tips to.

    Details

    To create an allocated tips payroll item:

    Easy Setup:

    1. From the Quickbooks menus at the top, click Lists > Payroll Item List.
    2. At the lower left of the Payroll Item List, click Payroll Item > List. 
    3. Select EZ Setup.
    4. Click Next.
    5. Choose Compensation.
    6. Click Next.
    7. Choose Tips in the Other compensation section.
    8. Click Next.
    9. Choose Allocated Tips (not common).
    10. Click Finish.
    11. Double-click on the item from the Payroll Item List to edit the name, change the liability account to an expense account, and/or default rate and limit.

    Note: On the right side of each window, there are help topics to assist you.

    When you click Finish, the Payroll Setup window closes, and a blank screen is displayed in QuickBooks.

    Custom Setup:

    1. From the Quickbooks menus at the top, click Lists > Payroll Item List.
    2. At the lower left of the Payroll Item List, click Payroll Item > List.
    3. Select Custom Setup.
    4. Click Next.
    5. Select Company Contribution, and then click Next.
    6. Enter the name of the payroll item (for example, Allocated tips), and then click Next.
    7. Because allocated tips do not create a payroll liability, do not enter a liability account in the next window. Enter an expense account in both the liability and expense account fields, and then click Next.
    8. When you receive a warning that the accounts are the same, click Yes to leave the accounts the same.
    9. In the Tax Tracking Type window, select Allocated Tips from the drop-down list, and then click Next.
    10. Keep the default tax tracking unless otherwise instructed by your tax advisor or accountant and click Next.
    11. In the next window, Based on quantity is normally not selected (consult your tax advisor or accountant) and click Next.
    12. Enter any default rate and annual limit if necessary. This is the default rate that is used unless the rate in the employee record is changed.
    13. Click Finish

    Assisted Payroll

    If you use the Assisted Payroll service, follow this procedure so that you can send the information to the payroll service

    Set up a payroll item for allocated tips as a company contribution.

    Important: Because allocated tips do not create a payroll liability for your company:
    1. Do not enter a liability account in the Liability Account field when setting up the item.
    2. Enter the same expense account as the one you enter in the Expense Account field.
    3. When QuickBooks asks if you are sure you want both accounts to be the same type, answer Yes.
    4. For the tax tracking type, choose Allocated Tips.

    After you determine the amount of allocated tips for an employee, assign the amount to the employee:

    • Option 1:
      1. Create a Liability Adjustment
      2. From the menus at the top, click Employees > Payroll Taxes and Liabilities > Adjust Payroll Liabilities.
      3. Make both the date and the effective date within the calendar year for the allocated tips.
      4. Click to select Employee. Choose the employee from the drop-down menu.
      5. In the Taxes and Liabilities section, click the Payroll Item column and select the Allocated Tips payroll item.
      6. Next to the Allocated Tips payroll item enter the amount as a positive amount. If you see a message suggesting that you create a paycheck instead, ignore the message.
      7. Use the Memo column to note what the adjustment is for, for future reference.
      8. Click Accounts Affected, choose Do not affect accounts.
      9. If you have additional employees, click Next Adjustment and repeat the steps for each affected employee. (Be sure to change the Date and Effective Date and Employee Name fields.)
      10. If there are no additional employees, click OK to save your entries.
      11. Review the Payroll Summary Report to verify that the totals are now correct.
    • Option 2:
      • Add your allocated tips payroll item and the amount to a regular paycheck for the employee. The amount does not affect the paycheck net amount. It does not print on the paycheck voucher or on a pay stub.

        Important: The paycheck date must be within the calendar year for the allocated tips.
    QuickBooks reports the amount for allocated tips on the employee's W-2 form. The amount is not included with wages and is not subject to any payroll taxes.
    Businesses that report allocated tips are required to submit IRS Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips.
    If you are using the Assisted Payroll service, the payroll service reports allocated tip income on employees' W-2 forms. However, the payroll service does not file Form 8027 for you.

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