Wisconsin allows restaurant owners to take a tip credit, which means you can pay tipped employees a base cash wage of $2.33 per hour instead of the full $7.25 minimum wage. The expectation is that tips make up the difference. If they don’t in any given pay period, you are legally required to cover the gap so the employee still earns at least $7.25 per hour.

Here’s how that looks in practice. Say an employee works 40 hours and reports $150 in total tips. Their base pay is $93.20 ($2.33 times 40 hours), and with tips their total is $243.20. Divide that by 40 hours and they’re at $6.08 per hour, which falls short of $7.25. You’d owe an additional $46.80 in makeup wages to bring them to the minimum. You need to run this calculation every pay period, not averaged across the month.

Tip reporting is where things get messy for a lot of restaurants. Credit card tips flow through your POS system and are easy to track. Cash tips depend on the employee reporting them, and they’re required to do so for any month where cash tips exceed $20. Most restaurants use a daily tip reporting form or a POS feature to capture this. Without a consistent process, you end up with underreported income that creates problems for both the employee and you at tax time.

All reported tips are taxable. You withhold federal income tax, Social Security, and Medicare on the employee’s full compensation including tips. You also pay the employer share of FICA on tip income. The tricky part is that cash tips have already left your hands. Withholdings for those tips come out of the employee’s base wages, and at $2.33 per hour there sometimes isn’t enough base pay to cover everything. When that happens, the employee owes the remaining tax.

If you run a tip pool, Wisconsin follows federal guidelines. Only employees who customarily receive tips can participate in a mandatory pool when you’re taking the tip credit. That generally means servers, bartenders, and bussers, not kitchen staff. If you want to include back-of-house workers, you’d need to pay the full minimum wage and give up the tip credit for those participating employees.

Record keeping matters more than most restaurant owners realize. Document each employee’s reported tips, hours worked, base wages paid, tip credit amount, and any makeup wages for every pay period. The Wisconsin Department of Workforce Development can audit, and if your records are incomplete, you’ll have a hard time proving you paid correctly.

Getting restaurant payroll wrong leads to back-pay claims, tax penalties, and frustrated employees. If you’re not confident your tipped payroll is set up correctly, it’s worth having someone review it now rather than discovering errors during an audit. Our Wisconsin small business bookkeeping services include working with restaurant owners to make sure payroll, tip tracking, and reporting are handled right from the start.