Tipped Employers Pay Options

Understanding Tip Reporting in Payroll

For employers with tipped employees, how tips are entered into payroll matters just as much as the amounts themselves. Different types of tips—cash vs. credit card, paid vs. owed, qualified vs. nonqualified—are treated differently for tax reporting, wage calculations, and compliance purposes. The payroll entry options below represent specific “buckets” used in ADP to ensure tips are recorded accurately, paid correctly to employees, and reported properly on Forms W-2 where required. Using the correct bucket helps avoid reporting errors, supports eligibility for applicable tax deductions (including those outlined in the One Big Beautiful Bill), and ensures your payroll remains compliant while giving employees the full benefit of their earned tips.

How to Use This Guide

This guide is designed to help you choose the correct payroll entry option when reporting tips for your employees. When entering payroll, start by identifying how the tip was received (cash or credit card), whether it has already been paid to the employee or still needs to be paid, and whether the tip qualifies for special tax treatment under the One Big Beautiful Bill. Once those questions are answered, you can match the situation to the appropriate bucket listed below.

Each section explains:

• What the entry is used for
• Whether the amount is paid to the employee or only reported
• How it is treated for tax purposes
• Whether and where it appears on the employee’s Form W-2

If you are ever unsure which option applies, it is better to pause and confirm before submitting payroll. Using the correct bucket helps ensure employees are paid accurately, tips are reported correctly, and your business stays compliant with wage and tax requirements. Your Secure HR team is always available to help review specific scenarios or answer questions before payroll is finalized.

Cash tips

The amount of tips that the employee has already received as cash. This amount may qualify for the tax deduction outlined in the One Big Beautiful Bill and is reported as taxable wages on the employee’s W-2.

W-2 reporting:

• Box 1, Box 3, Box 5, Box 16, Box 18
• Taxability:
• Taxability varies
• Paid/reported:
• Reported

Credit card tips owed

The amount of tips that the employee has received by credit card payment but still needs to be paid to the employee in a payroll. This amount may qualify for the tax deduction outlined in the One Big Beautiful Bill and is reported as taxable wages on the employee’s W-2.

W-2 reporting:

• Box 1, Box 3, Box 5, Box 16, Box 18
• Taxability:
• Taxability varies
• Paid/reported:
• Paid to employee

Credit card tips paid

The amount of tips that the employee has received by credit card payment and has already been paid in cash. This amount may qualify for the tax deduction outlined in the One Big Beautiful Bill and is reported as taxable wages on the employee’s W-2.

W-2 reporting:

• Box 1, Box 3, Box 5, Box 16, Box 18
• Taxability:
• Taxability varies
• Paid/reported:
• Reported

Nonqualified Cash tips

The amount of tips that the employee has already received as cash. This amount is not qualified for the tax deduction outlined in the One Big Beautiful Bill and is reported as taxable wages on the employee’s W-2.

W-2 reporting:

• Box 1, Box 3, Box 5, Box 16, Box 18
• Taxability:
• Taxability varies
• Paid/reported:
• Reported

Nonqualified Credit card tips owed

The amount of tips that the employee has received by credit card payment but still needs to be paid to the employee in a payroll. This amount is not qualified for the tax deduction outlined in the One Big Beautiful Bill and is reported as taxable wages on the employee’s W-2.

W-2 reporting:

• Box 1, Box 3, Box 5, Box 16, Box 18
• Taxability:
• Taxability varies
• Paid/reported:
• Paid to employee

Nonqualified Credit card tips paid

The amount of tips that the employee has received by credit card payment and has already been paid in cash. This amount is not qualified for the tax deduction outlined in the One Big Beautiful Bill and is reported as taxable wages on the employee’s W-2.

W-2 reporting:

• Box 1, Box 3, Box 5, Box 16, Box 18
• Taxability:
• Taxability varies
• Paid/reported:
• Reported

Nonqualified Tipped overtime hours

The number of overtime hours worked by an employee who receives tips. These hours are not qualified as overtime under the One Big Beautiful Bill.

W-2 reporting:

• No W-2 impact
• Taxability:
• Taxable
• Paid/reported:
• Paid to employee

Tip Credit

The amount of tips the employer counts as wages and can then deduct from the amount they pay toward an employee’s minimum wage payment. This amount is not reported on the employee’s W-2.

W-2 reporting:

• No W-2 impact
• Taxability:
• Nontaxable
• Paid/reported:
• Reported

Tipped hours

The number of regular hours worked by an employee who receives tips. The amount is used to determine how tips are allocated.

W-2 reporting:

• No W-2 impact
• Taxability:
• Taxable
• Paid/reported:
• Paid to employee

Tipped overtime hours

The number of overtime hours worked by an employee who receives tips. These hours may qualify for the tax deduction outlined in the One Big Beautiful Bill.

W-2 reporting:

• No W-2 impact
• Taxability:
• Taxable
• Paid/reported:
• Paid to employee

Examples

The following pages contain clear, real-world scenarios written in plain language that map directly to the buckets you will see in ADP. These are designed so a payroll admin or manager can quickly say “Yep, that’s us” and choose correctly.

Real-World Tip Reporting Examples

Example 1: Cash Tips Taken Home After a Shift

A server receives $120 in cash tips directly from customers during their shift and takes that money home the same night.

Use: Cash Tips
Why: The employee already received the cash, but the tips still must be reported for tax and W-2 purposes.
Paid or Reported: Reported only (no additional pay issued).

Example 2: Credit Card Tips That Will Be Paid on Payroll

A bartender earns $250 in tips from credit card transactions during the week. Those tips will be paid to the employee on their paycheck.

Use: Credit Card Tips Owed
Why: The tips were earned but have not yet been paid to the employee.
Paid or Reported: Paid to the employee through payroll.

Example 3: Credit Card Tips Already Cashed Out

A restaurant runs daily tip payouts. At the end of the shift, a server is paid their credit card tips in cash from the register.

Use: Credit Card Tips Paid
Why: The employee already received the money, but it still must be reported as taxable wages.
Paid or Reported: Reported only.

Example 4: Tips That Do Not Qualify for Special Tax Treatment

An employee receives cash tips that do not meet the requirements outlined in the One Big Beautiful Bill.

Use: Nonqualified Cash Tips
Why: These tips must still be reported as taxable wages, but they are not eligible for the special deduction.
Paid or Reported: Reported only.

Example 5: Nonqualified Credit Card Tips Paid Through Payroll

An employee earns credit card tips that are not qualified under the One Big Beautiful Bill and will be paid on their paycheck.

Use: Nonqualified Credit Card Tips Owed
Why: The tips still need to be paid and reported, but without the special tax treatment.
Paid or Reported: Paid to the employee.

Example 6: Nonqualified Credit Card Tips Already Paid in Cash

An employer pays out nonqualified credit card tips in cash at the end of each shift.

Use: Nonqualified Credit Card Tips Paid
Why: The employee has already received the money, but it must still be reported.
Paid or Reported: Reported only.

Example 7: Tipped Employee Working Overtime (Qualified)

A tipped employee works 46 hours in a week. The overtime hours qualify under the One Big Beautiful Bill.

Use: Tipped Overtime Hours
Why: These hours are tracked for pay purposes and may qualify for special tax treatment.
Paid or Reported: Paid to the employee.

Example 8: Tipped Employee Working Overtime (Nonqualified)

A tipped employee works overtime hours that do not qualify under the One Big Beautiful Bill.

Use: Nonqualified Tipped Overtime Hours
Why: These hours must still be paid, but do not qualify for special tax treatment.
Paid or Reported: Paid to the employee.

Example 9: Tracking Regular Hours for Tip Allocation

A server works 32 regular hours in a week. These hours are used to help calculate and allocate tips properly.

Use: Tipped Hours
Why: These hours help determine tip allocation but do not directly affect W-2 reporting.
Paid or Reported: Paid to the employee.

Example 10: Using the Tip Credit

An employer applies a portion of an employee’s tips toward meeting minimum wage requirements.

Use: Tip Credit
Why: This amount is used for wage calculations but is not reported on the employee’s W-2.
Paid or Reported: Reported only (not paid as wages).

Helpful Tip for Employers

If the employee already has the money, the entry is usually reported only.
If the employee still needs to be paid, the entry should result in payment through payroll.

Common Mistakes to Avoid When Reporting Tips

Even experienced payroll users can run into issues when reporting tips. The mistakes below are common, easy to avoid, and can save time, confusion, and compliance headaches when handled correctly.

1. Using “Cash Tips” for Credit Card Tips

Why it happens:
The employee already received the money, so it feels like “cash.”

Why it’s a problem:
Credit card tips flow through the business and should be tracked as such, even if they are paid out in cash. Using Cash Tips instead of a credit card tip category can cause payroll, POS, and merchant reports to stop matching.

Best practice:
If the tip was left on a credit card, always use a credit card tip bucket — paid or owed.

2. Paying Tips Outside of Payroll Without Reporting Them

Why it happens:
Daily cash-outs or end-of-shift payouts feel “off payroll.”

Why it’s a problem:
All tips are taxable wages and must be reported, even if they are paid outside of payroll. Failing to report tips can lead to W-2 inaccuracies and issues in audits or wage reviews.

Best practice:
If the employee already has the money, use a reported-only tip category.

3. Using “Paid” Buckets When No Payment Is Needed

Why it happens:
The wrong bucket is selected during a busy payroll run.

Why it’s a problem:
This can result in tips being paid twice, once outside payroll and once on the paycheck.

Best practice:
Before submitting payroll, confirm whether the employee still needs to be paid or if the tip was already paid.

4. Treating Qualified vs. Nonqualified Tips as a Payroll Decision

Why it happens:
The distinction sounds like a payroll setting.

Why it’s a problem:
Whether a tip qualifies under the One Big Beautiful Bill is a tax determination, not a payroll calculation. Payroll simply reports what is entered.

Best practice:
Use qualified or nonqualified buckets based on guidance you’ve already received, not as a guess.

5. Forgetting to Enter Tipped Hours

Why it happens:
Tips feel like the focus, so hours get overlooked.

Why it’s a problem:
Tipped hours are often used to calculate allocations, tip credits, and wage compliance. Missing hours can distort calculations and reports.

Best practice:
Always enter tipped hours and tipped overtime hours accurately, even when tips are reported separately.

6. Mixing Tip Credit With Tip Payments

Why it happens:
The term “tip credit” sounds like income.

Why it’s a problem:
Tip credit is a wage calculation tool, not a payment to the employee. Entering it incorrectly can distort wage records.

Best practice:
Use Tip Credit only to track the portion of tips applied toward minimum wage requirements — never as a payment.

7. Waiting Until Year-End to Fix Tip Reporting Issues

Why it happens:
Small issues don’t feel urgent.

Why it’s a problem:
Fixing tip errors late in the year can require amended payrolls, corrected W-2s, and extra administrative time.

Best practice:
Address issues as they come up and ask questions early.

Helpful Reminder

Getting tip reporting right is less about tax math and more about telling the right story across payroll, POS, and financial records.

Important note

The examples provided do not interpret or redefine eligibility under the One Big Beautiful Bill. They simply show which bucket to use if a tip or hour is classified as qualified or nonqualified — which is exactly how ADP intends these fields to be used.

Why this matters

This is not “tax advice.” The information includes:

• Explaining payroll mechanics
• Reinforcing accurate reporting
• Leaving qualification determinations where they belong (tax guidance / legislation / advisor review)