Paying contractors Tips

[jennEvolve]

Square allows tracking of tips for contractors and employees.  It will automatically import them in payroll for employees but NOT for contractors.  YET... we can manually input the tip money to be paid to the contractor in payroll. I was told that was because tips are considered taxable.  But if we are still adding them to the paycheck, it's just adding an extra step for services that we are already paying for.  Payroll is becoming more and more cumbersome and requiring manual work for services that we keep having to pay new subscription fees for.  

[TheRealChipA]

Hi @jennEvolve.  It sounds like your contractors aren’t set up as tip eligible.  Go to your dashboard Team Roster (not the Payroll Team, but the regular Team Roster) and edit one of them.  Even if they are paid entirely by commission, and you have their salary or hourly rate set to $0, you must mark their role as tip eligible in order for the Payroll import to know they might have tips out there.

I think that should do the trick, but if it doesn’t let me know.

[LylaClayre]

I have my contractor set up as tip eligible and her tips are still not importing to payroll. I have the automated tip importing set up and it works for my employees. I would like to know how to fix this so that I don't have to look at each shift and add up the tips before paying my contractor.

[TheRealChipA]

Hi @LylaClayre.  Interesting.  Then it sounds like I might have been incorrect in my previous post here.  Given that, I did some quick research in some trusted accounting journals and blogs that I go to for answers.  Here’s what I learned.

You (and the original poster @LylaClayre) have touched upon a rather murky and undefined area in the world of tips.  All federal and most state laws regarding tipping have to do with W-2 employees.  These laws were not created with the idea that a 1099 contractor could be tipped, at least not as employees are.

I’m only guessing here, but Square probably did not include contractors in tips because of the murkiness and the discrepancies around how the various states handle it.  Some (like mine) require that tips received for contractors be considered income to the employer (me) and they passed on as 1099 wages to the contractor.  I’d imagine that the feds look at it the same way since they don’t allow for me as the employer to take the employer tax credit for contractor tips like they allow it for W-2 employee tips.

That’s my long way of saying that this is an area I would recommend talking to your accountant or CPA about to be sure you are handling it so that you don’t raise any red flags, which none of us want as far as our taxes go.  Honestly, I’d be surprised if your accountant didn’t say something like I layed out in the previous paragraph.  From an accounting point of view, it makes sense that since this team member is a contractor, we’d have to do something very different that we do for regular tipped employees.

I’ll also tag a couple of Community moderators here, any of whom can check with the payroll team and correct me if I’m wrong about Square excluding contractors from tips/tip pools for good, legal reasons. @_Violet @JJ_ @MayaP @BernadetteA 

[Laurie_]

Thanks for jumping in to provide this information, @TheRealChipA!

@LylaClayre, to answer your question, tips are not automatically imported for 1099 contractors through Square Payroll at this time. This is currently a feature request, and for now, your only option would be to manually add tips to the pay run along with regular wages as required. We aren't able to provide tax advice and for these matters, we strongly advise consulting with a tax professional to ask about your obligations.

I'll continue to relay your feedback to our team, but as of now, I'm not aware of any planned changes for 2024 regarding this matter.