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Tips on Tip Reporting

Complying with IRS tip reporting rules is one of the most critical and important tasks facing restaurant owners. This is truer today than a decade ago as the IRS is accelerating its efforts to capture previously lost revenue in the form of income and FICA (Social Security and Medicare) tax. As a restaurant owner, you should be aware of your responsibilities regarding the reporting of your employees’ tips.

Tips are Taxable Income

One of the most important factors that restaurant employers and employees should both be aware of is that tips are considered taxable income. Because of this, employees and employers each have specific reporting requirements.

Tip reporting is required not only from the owner's side of the business but the employee's side as well. Federal tax law requires any employee who receives at least $20 in tips in a month, to keep a daily record and report the tips to their employer. This reporting should be done at least once a month, on the 10th day following the month in which the tips were received. This applies to any employee, whether they receive tips directly from guests (e.g., servers and bartenders) or indirectly (e.g., bus persons) by sharing tips received by other employees.

Restaurants with tipped employees have to document that they are complying with both labor and tax laws. In other words, employers have to pay tipped employees the correct amount and, in turn, account for the appropriate amount of payroll taxes.

Withholding Requirements

You also need to withhold income and FICA tax from each paycheck and report each employee’s tips to the IRS. Assuming that you use a payroll service to process your payroll, you will need to report the total tips reported for the payroll period as submitted to you by that employee, along with the tipped employee’s hours and hourly rate. This information will also be included on your “Employer’s Quarterly Payroll Tax Return” (Form 941).

Automatic gratuities are service charges, not tips.  Generally, service charges are reported as non-tip wages paid to the employee. Some employers keep a portion of the service charges. Only the amounts distributed to employees are non-tip wages.  Service charges do not qualify as tips for the tip credit.

Required Filing

Employers are required to file a Form 8027 at the end of the year if (1) you operate a business where food and beverages are served for on-site consumption, (2) tipping is customary, and (3) you employed more than 10 employees (count all your employees, not just food and beverage staff) whose combined hours exceeded 80 on a typical business day.

This is a complicated area of your business, but an essential one. Putting procedures and processes in place to make certain your establishment is compliant is another area of SVA’s expertise. For more information on this area, please feel free to contact me.

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Biz Tip Topic Expert: Nicole Gralapp, CPA, CExP™

Nicole Gralapp, CPA, CExP™

Nicole is a Principal at SVA Certified Public Accountants working primarily with closely-held businesses and individual clients. Nicole performs a variety of tax, assurance and business consulting functions. She provides clients with technical expertise in areas such as tax planning, financial reporting, financial projections, budgeting, financial and estate planning and review of internal controls. Her experience in the hospitality, restaurant, construction and professional services industries gives her the ability to consult with clients in a variety of areas.

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