This article is for admins who manage tip wages, distributed service charges, or tip credits in Gusto.
Businesses handle different types of tips and service charges, and each has its own rules for reporting and taxes. Entering them correctly in Gusto helps you stay compliant and makes sure your employees are paid correctly.
Cash tips: Customers give workers cash directly.
Paycheck tips (credit card or electronic): Customers pay tips electronically, and the business pays them through payroll with taxes withheld.
Distributed service charges: Fees the business adds to customer bills. These are not tips, and the business controls how they’re distributed.
Note: Any tips you enter through a non-Gusto payroll will not appear on reports you run in Gusto.
Cash tips belong to the worker, but you still need to report them for taxes if they total $20 or more in a month.
Key points:
Customers decide how much to tip.
Employees keep the cash right away. No taxes are withheld at the time of payment, but workers need to report tips on their tax forms.
Employees may share tips among themselves (tip pooling).
To report cash tips in Gusto:
Go to Pay.
Click Run Payroll.
Where to find cash tips depends on how you view payroll:
Legacy view: Find the employee and under Additional Earnings, click + Cash Tips.
Spreadsheet view: Enter the amount in the Cash tips column.
Finish running payroll.
Paycheck tips are processed through payroll, and we automatically withhold taxes.
Key points:
Customers pay tips electronically.
The business pays tips in the employee’s paycheck.
We automatically withhold taxes.
Tips appear on the employee’s paystub.
To report paycheck tips in Gusto:
Go to Pay.
Click Run Payroll.
Where to find paycheck tips depends on how you view payroll:
Legacy view: Find the employee and under Additional Earnings, click + Other Earnings. Enter the amount in Paycheck tips.
Spreadsheet view: Enter the amount in the Paycheck tips column.
Click Save.
Finish running payroll.
Service charges are business fees, not customer tips. The business decides how to distribute or keep the funds. Service charges are common on bills for large groups or special events.
Note: If the business distributes the service charge to employees, it counts toward overtime pay and minimum wage requirements.
Key points:
The business adds them automatically to bills for groups or events.
The business fully controls the amount.
The business may or may not share them with workers.
To report distributed service charges in Gusto:
Go to Pay
Click Settings.
Click the Custom earnings tab.
Click + Add custom earning.
Select Distributed Service Charges as the earning type. We include these in overtime pay and minimum wage adjustments.
Give the earning code a name.
Click Save.
Go to Pay.
Click Run Payroll.
Find the employee and under Additional Earnings, click + Distributed Service Charges.
Enter the amount.
Finish running payroll.
We added new tools in Gusto to support tip reporting under the One Big Beautiful Bill (OBBB) Act.
We added a new earning type called Distributed Service Charge for mandatory service charges. These do not qualify for tip tax deductions.
We now collect Treasury Tipped Occupation Codes (TTOCs) for tipped employees.
1. Find the Treasury Tipped Occupation Code (TTOC)
Each tipped employee must have a valid TTOC. You can find valid codes in the official Treasury document.
Tipped employees must have a TTOC on their W-2 to claim a tip tax deduction starting in 2026.
2. Add the TTOC to each qualified tipped employee
If no TTOC applies, leave the field blank. That employee’s tips will not qualify for a tax deduction.
Follow these steps for each employee in a tipped occupation:
Go to People.
Select the employee.
Click Pay.
Click Edit under Compensation.
Enter the employee’s TTOC.
Click Save.
Voluntary tips may qualify for tax deductions.
Non-voluntary tips or mandatory service charges do not qualify.
We automatically create a Distributed Service Charge earning code if:
You paid tips in 2025, or
You have employees in tipped industries.
If you do not see this earning code when running payroll, you can add a custom earning code by following the steps in the related Help Center article.
The FICA Tip Credit lets eligible employers claim a federal tax credit for the employer portion of Social Security and Medicare taxes paid on employee tips.
This credit applies only to tips that are above a required minimum wage threshold.
We provide an Employee Tips Report to help you calculate the credit. Run the report at any time during the year to view employee tip amounts (based on payrolls you already ran).
We do not file IRS Form 8846 for you.
You may qualify if:
Employees receive tips for serving food and beverages or providing personal care, and
You pay employer Social Security and Medicare taxes on those tips.
Two types of businesses can claim this credit:
Food and beverage businesses.
Minimum wage threshold: $5.15 per hour (based on federal law from January 1, 2007).
Examples:
Restaurants
Bars
Catering
Minimum wage threshold: $5.15 per hour (This is based on federal law from January 1, 2007.)
Beauty and personal care businesses.
Minimum wage threshold: $7.25 per hour.
Beauty services were added in 2025 under the One Big Beautiful Bill Act (OBBBA).
Examples:
Hair salons
Barbershops
Nail salons
Spas
Esthetics
We updated the Employee Tips Report to follow current IRS rules.
The report now:
Shows tip wages for each employee
Separates tips into:
Tips that may qualify for the FICA Tip Credit
Tips that may not qualify
This helps you apply the correct calculation based on each employee’s role and wages.
Only tips above the required wage threshold qualify.
Step 1: Calculate the required wage amount
For each employee: Multiply hours worked by the correct minimum wage threshold ($5.15 or $7.25 depending on role)
Step 2: Subtract wages you paid (not including tips)
Subtract wages paid by the employer. Do not include tips.
The result is the non-qualifying tip amount. Only the remaining tips qualify for the credit.
An employee:
Works 100 hours
Receives $450 in tips
Is paid $375 in wages ($3.75/hour)
Using the $5.15 threshold:
100 hours × $5.15 = $515 required wages
$515 – $375 = $140 non-qualifying tips
$450 – $140 = $310 qualifying tips
The FICA tip credit applies to the $310 amount.
To generate the report:
Go to Reports.
Scroll down and click Employee tips.
Select the year.
Click Generate report.
Then:
Review each employee’s tips.
Confirm their role (food/beverage or beauty services).
Apply the correct wage threshold.
Work with your CPA or tax advisor and use qualifying tips to complete lines 5–6 of Form 8846.
We do not file Form 8846.
To claim the credit:
Use the Employee Tips Report.
Complete IRS Form 8846.
File it with your federal tax return
If any employee earned more than $176,100 in wages and tips for the year, review Line 4 on Form 8846.
Work with your CPA or tax advisor to complete the form accurately. We do not provide tax or legal advice.
Apply the correct threshold to each employee:
$5.15 for food and beverage
$7.25 for beauty services
The report shows tips by employee to help you separate them correctly.
The credit depends on:
Hours worked
Wages paid
The correct threshold
Changes during the year may affect the qualifying amount.
What we provide:
Employee Tips Report
Tip wage breakdown by employee
Separation of potentially qualifying and non-qualifying tips
What we do not do:
File IRS Form 8846
Provide tax advice
Calculate your final credit amount
Submit the credit to the IRS
We're building additional tools to improve FICA Tip Credit support, including:
The ability to tag employee roles
More automation in credit calculation
A pre-filled Form 8846 experience
Check back for updates.
Q: Where can I find the official IRS rules?
A: See IRS Form 8846 and its instructions at IRS.gov/Form8846.
Q: Can Gusto close or adjust past credits?
A: No. Work with your tax advisor if you need to correct a prior filing.
The Fair Labor Standards Act (FLSA) tip credit allows employers to pay tipped employees less than the minimum wage if tips bring their earnings up to at least the legal minimum.
The federal minimum wage is $7.25/hr (some states and cities require more) for non-exempt employees.
The federal tipped minimum wage is $2.13/hr, but states often set higher amounts.
Employers need to pay the difference if tips do not meet the minimum wage.
The credit is a tax adjustment. It does not reduce employee pay.
To set up or edit FLSA tip credits in Gusto:
Go to People.
Click Team members.
Select the employee’s name.
If the current address is incorrect, edit the work address.
Next to Compensation, click Edit.
Set Employee Type to Paid by the Hour.
Enter the hourly wage.
Check I pay this employee less than minimum wage because they receive tips. You need to enter the hourly wage first.
Choose the correct Hourly Minimum Wage from the dropdown. If you do not know what to use, work with a CPA or call the state.
Set the effective date or pay period.
Add a note about the reason.
Click Save.
When you run payroll, we’ll adjust pay if tips and wages do not meet the minimum wage. If we adjust the gross pay for this reason, you’ll find an Adjusted tag next to the employee’s gross wages on the first page of payroll. This will not update the employee’s compensation in their Gusto profile.
Review your tip credit settings if:
Your company size changes (you add or dismiss employees).
Minimum wage increases or laws change.
An employee’s work location changes.
You never set it up before.
For legal questions, call the U.S. Department of Labor: (866) 487-9243.
Hourly wage: $3/hr
Minimum wage required: $8/hr
Employee worked 10 hours = $30 wages + $40 tips = $70 gross
Required: $80 gross ($8 × 10 hours)
We adjust payroll by $10, so the total gross equals $80.
Knowing which minimum wage applies to your team helps you stay compliant.
The federal minimum wage is $7.25/hr (unchanged since 2009).
Many states and cities set higher rates. You must always pay the highest applicable rate.
If you set up Fair Labor Standards Act (FLSA) tip credits in Gusto, we alert you to state and local increases and update your settings automatically.
To find a minimum wage:
Priority support customers: Use the Minimum Wage Map in the HR Resource Center.
All customers:
You can also check out our blog on minimum wages.
Q: Do employees need to report cash tips to their employer?
A: Yes, if tips total $20 or more in a month.
Q: Are service charges the same as tips?
A: No. Service charges that you distribute to employees are business fees, not voluntary customer tips.
Q: Does Gusto file Form 8846 for FICA tip credits?
A: No. You need to file it outside Gusto with your CPA or tax advisor.
Q: What happens if tips do not bring employees up to minimum wage?
A: The employer needs to pay the difference.