The menu commands seem to work better — or at least in a more logical fashion — than the shapes/paths pull-down menus. Try selecting both layers, the selecting Layer>Combine Shapes>Subtract Front Shape
(Actual menu names may be different, I have my Photoshop language set to Finnish)
If you have Illustrator, cutting out shapes from other shapes is a task more suited to illustrator, and I would personally do it there instead.