DOES THE IRS REQUIRE THAT ALL TIPS ARE REPORTED?
All tips received by employees are required by the IRS to be included in the employee’s taxable income. The law requires that 100% of tips be reported. Employers and employees are required to track and report income received from tips. If the total tips reported by employees are less than 8% of the total food and beverage sales then the employer is required to allocate the difference between 8% of total food and beverage sales and the amount of reported tips among all directly tipped employees who reported less than 8% of their share of sales.
CAN A RESTAURANT REQUIRE THAT SERVERS PARTICIPATE IN A TIP POOLING ARRANGEMENT?
The requirement that an employee retain all tips does not prevent tip-splitting or tip-pooling arrangements among employees who customarily receive tips. The following occupations have been recognized by the U.S. Department of Labor (DOL) as falling within the eligible category: bellhops, waiters and waitresses (including cocktail servers), counter personnel who serve customers, bussers, and service bartenders. The DOL construes the Fair Labor Standards Act (FLSA) as precluding employers from pooling tips among occupations that do not customarily and regularly participate in tip pooling, including dishwashers, chefs or cooks.
A valid employer-operated tip-pooling arrangement cannot require servers to contribute a greater percentage of their tips than is customary and reasonable.
For the DOL’s Fact Sheet on Tipped Employees, please click here.
DOES ARIZONA HAVE A MINIMUM WAGE?
Yes. Arizona first passed a minimum wage law in 2006 going above the federal standard. Most recently, Prop. 206 was passed in 2016 raising Arizona’s minimum wage to $12 per hour by 2020 and creating a mandatory Paid Sick Time (PST) law. The current schedule for the Arizona minimum wage is:
- $10.00 per hour on or after January 1, 2017
- $10.50 per hour on or after January 1, 2018
- $11.00 per hour on or after January 1, 2019
- $12.00 per hour on or after January 1, 2020
FOR FLAGSTAFF EMPLOYERS: In 2016 the City of Flagstaff passed Prop. 414 which created a minimum wage higher than the State minimum wage and reach $15 an hour by 2021. In March 2017, the City Council amended this law to slow the pace of the wage growth in the City. Under the current language, the Flagstaff minimum wage is:
- $10.50 per hour on or after July 1, 2017
- $11.00 per hour on or after January 1, 2018
- $12.00 per hour on or after January 1, 2019
- $13.00 per hour on or after January 1, 2020
- $15.00 per hour on or after January 1, 2021
- $15.50 per hour on or after January 1, 2022
Beginning in 2021, Flagstaff’s minimum wage must be that rate stated above or $2 above the state minimum wage, whichever is higher.
DOES ARIZONA HAVE A TIP CREDIT LAW?
The Arizona minimum wage law impacts the maximum tip credit an Arizona employer may take. Unlike the FLSA, which currently allows a higher tip credit per hour, Arizona employers are only permitted to take is $3 per hour tip credit (Flagstaff employers, please see below). Therefore, an employee who customarily and regularly receives tips must be paid a direct wage of no less than $3.00 under the minimum wage listed above. The amount per hour that the employer takes as a tip credit must be reported to the employee in writing each workweek. If the employer takes a $3 tip credit and the employee does not make at least $3 per hour in tips during the workweek, the employer must make up the difference. In other words, if the employee’s tips combined with the employer’s direct wages do not equal the Arizona minimum hourly wage, then the employer must make up the difference.
FOR FLAGSTAFF EMPLOYERS: In 2016, the City of Flagstaff passed Prop. 414 which created a separate minimum wage and tip credit structure for the City of Flagstaff. Under the Flagstaff law employers may take a tip credit of:
- $3.00 per hour on or after July 1, 2017
- $2.50 per hour on or after January 1, 2022
- $2.00 per hour on or after January 1, 2023
- $1.50 per hour on or after January 1, 2024
- $1.00 per hour on or after January 1, 2025
DOES THE ARA RECOMMEND THAT RESTAURANT ACCOUNTING BE DONE IN HOUSE OR IS OUTSOURCED?
Due to the complexity of payroll and the tax deposit requirements it is recommended that a professional payroll service be used. These services prepare all employee checks (or direct deposit) and employer required tax deposits along with filing all quarterly and annual reports that are required by the various taxing agencies. They can also provide information for the FICA tip credit (described below) and other various credits.
Employee leasing organizations also provide the above payroll services but can also offer employee benefits (such as health insurance, retirement plans, etc.) that are either too expensive for an individual business or are too difficult to maintain.
WHAT IS A 45(B) FICA TAX CREDIT?
The so-called 45(B) credit, named after a section of the federal Internal Revenue Code, is a “general business credit” that lets restaurateurs reduce their federal income taxes by the amount of FICA taxes they pay on certain employee tips. Congress established the credit in 1993 at the urging of the National Restaurant Association.
The 45(B) credit applies to employers who operate a food or beverage establishment where tipping is customary and where food or beverages are served for either on- or off-premises consumption.
To read more about the 45(B) FICA Tax Credit, please click here.
WHAT IS THE WORK OPPORTUNITY TAX CREDIT AND HOW DOES IT WORK?
The Work Opportunity Tax Credit (WOTC) allows employers who hire individuals from certain qualified groups to claim a tax credit equal to 25% or 40% of the employee’s first-year wages. These credits are capped at different amounts depending on the target group to which the employee belongs. To learn more about the WOTC, please visit the U.S. Department of Labor by clicking here.
CAN RESTAURANTS TAKE A MEAL CREDIT FOR MEALS PROVIDED TO EMPLOYEES?
Under the Fair Labor and Standards Act (FLSA), restaurant employers may take credit for food which is provided at cost. This typically is an hourly deduction from an employee’s pay. However, the employer cannot take credit for discounts given employees on food (menu) prices.
To read more about the FLSA and how it applies to restaurants, please click here.
HOW OLD DO YOU HAVE TO BE TO WORK IN A RESTAURANT IN ARIZONA?
Both federal and state laws govern the employment of youth in Arizona. These various rules fall into three categories:
UNDER 14: Unless they are working for a business owned directly by their parents, federal law generally restricts employment of youth under the age of 14 to newspaper delivery and babysitting.
14 & 15: Both federal and state laws place various restrictions on the type of duties and hours these youth can perform. Because there is overlap between the federal law and the state law, we are listing whichever is more strict. In general, youth aged 14 or 15 may not work:
- More than 3 hours on a school day
- More than 18 hours per week when school is in session
- More than 8 hour on a day school is not in session
- More than 40 hours per week when school is not in session
- Before 7:00AM
- After 7:00PM – except from June 1st through labor day when the deadline is extended to 9:00PM
Federal and state laws also heavily restrict the type of work 14 & 15-year-olds may perform. In additions to the restrictions for 16 & 17-year-olds, Arizona law prohibits the following activities for those under 16:
- Maintenance or repair of machines or equipment of the establishment
- Cooking and baking, except at soda fountains, lunch counters, snack bars or cafeteria serving counters
- Setting up, adjusting, cleaning, oiling or repairing power-driven food slicers, grinders, choppers and cutters
- All work in preparation of meats for sale, except wrapping, sealing, labeling, weighing, pricing and stocking
16 & 17: The rules for 16 & 17-year-olds are less restrictive. Under federal and state law, 16 & 17-year-olds do not have restrictions on the hours they work (aside from the standard FLSA rules that apply to all employees). However, several cities and towns in Arizona do have youth curfew laws that may interfere with their employment. Most municipal curfew laws prevent 16 & 17-year-olds from being out past 12:00AM. The ARA recommends that all employers contact their city’s police department for specific curfew information.
While federal and state laws do not restrict the hours of work for youth aged 16 and 17, they do place restrictions on the type of work that can be performed. Arizona law prohibits the following activities for those under 18:
- Occupations involving slaughtering, meat packing, processing or rendering of meat or the operation, setup, repair, adjustment, oiling or cleaning of a power-driven meat processing machine
- Occupations involving the operation of a power-driven bakery machine
- Occupations involving the operation of a power-driven paper products machine
- Occupations involving the operation of a power-driven saw.
Please note: the list of prohibited occupations for youth listed here is not comprehensive and is narrowed to those most likely to apply to the restaurant industry. All employers are encouraged to visit the Arizona Industrial Commission’s Youth Employment page and the U.S. Department of Labor’s Fact Sheet #43 dealing with youth employment for more information.
ARE EMPLOYERS REQUIRED TO FILL OUT AN I-9 FOR ALL EMPLOYEES?
All employers are required to verify the employment eligibility of and complete a Form I-9 (Employment Eligibility Verification form) for every employee hired after Nov. 6, 1986. Employers who show good-faith compliance with the employment-verification requirements establish a defense that they have not knowingly hired an undocumented immigrant.
For access to the current I-9 form, please click here.
ARE THERE SPECIFIC GUIDELINES TO FOLLOW WHEN CREATING A RESTAURANT’S DRUG POLICY?
Yes, Arizona law contains protections from litigation for employers that have established a qualifying drug policy and testing program. Below is a brief outline of the requirements for employer drug policies. However, employers should work with their law firm to ensure their drug policies provide the greatest protections. If you do not currently work with a lawyer or need a recommendation, please contact the ARA.
Employers must distribute their written drug policy to all employees and prospective employees. These policies must include, but are not limited to:
- A statement of the employer’s policy respecting drug and alcohol use by employees
- A description of those employees or prospective employees who are subject to testing
- The circumstances under which testing may be required
- The substances as to which testing may be required
- A description of the testing methods and collection procedures to be used
- The consequences of a refusal to participate in the testing
- Any adverse personnel action that may be taken based on the testing procedure or results
- The right of an employee, on request, to obtain the written test results
- The right of an employee, on request, to explain in a confidential setting, a positive test result
- A statement of the employer’s policy regarding the confidentiality of the test results
CAN RESTAURANT PATRONS SMOKE ON A PATIO IN ARIZONA?
Yes. There are some public places that are specified under the Smoke Free Arizona Act as smoke-free exempt areas. Restaurateurs are especially interested in the patio exemption. Under the Act outdoor patios are exempt so long as tobacco smoke does not enter prohibited areas through entrances, windows, ventilation systems or other means.
For an outdoor area to be designated a smoking-permitted area, it must meet the requirements of Arizona Administrative Code, R9-2-108 , including the following:
- Be a contiguous area of the place of employment or public place controlled by the proprietor
- At least one side of the patio and overhead covering must either be open space or made from permeable material
- The smoking area must be 20 feet from any entrance or the proprietor must use a method (e.g. air curtain or blowers) that does not allow smoke to drift to the entrance or otherwise allow smoke into the establishment