A unique set of tax rules apply to employers and employees of the service industry. These include taxes on employee tips from patrons.
Like wages, these tips are required to be taxed as ordinary income — including Social Security and Medicare tax payments. The following guide is designed to educate service industry employers and employees about complying with tax laws regarding reported tips.
Reporting Employee Tip Income
All employees must report cash tips unless the total amount of tips they receive is under $20 for any given month of the year. Tips are to be reported by the 10th of each month after the tips were received. Any tips that are not paid in cash — known as non-cash tips — do not need to be reported to the employer.
Each type of tip received by an employee — cash or non-cash — is included in the employee’s gross income and is subject to tax payments. However, if an employee splits a tip with another employee, they are only required to report the tip they kept for themselves.
Employer Requirements for Reported Tips
Here is a shortlist of the requirements for reporting tips by employers:
- Retain an employee tip report to help make check stubs
- Withhold FICA taxes and employee income taxes
- Pay the employer’s share of FICA taxes
- File form 941, along with making federal deposits
- Include all tip income on Form W-2, Box 1, 5, and 7
Have you thought about seeking help in organizing records of payments to your employees? Why not make check stubs?
Service Charges for Reporting Tips
Any service charges given to an employee by an employer are maintained the same way as regular wages. These service charges are:
- Not included in daily tip records for employees
- Are filed with Form W-2, Boxes 1, 3, and 5
- Subject to income tax and FICA tax withholding
Double-check that you have recorded this information accurately. Having to process amended tax returns can be both time-consuming and costly.
How To Handle Allocated Tips
Suppose all employees’ tips at a restaurant or bar are less than 8% of gross income receipts. In that case, the employer will have to administer the 8% difference of those receipts and the actual tip income among all employees who received tips.
If an employer is required to allocate tips:
- They are shown as a separate entry on Form W-2, Box 8
- They are now included on Form W-2 in boxes 1, 5, or 7
- The employee will file Form 4137 for Social Security and Medicare Tax on Unreported Tip Income
Again, recording this information accurately will ensure that you avoid costly mistakes in reporting taxable income. Your future self will thank you.
Compliance Agreement for Voluntary Tips
The IRS has created voluntary tip compliance agreements for industries where tipping takes place. These establishments usually include restaurants and bars. These agreements benefit from helping employers and employees educate themselves about remaining tax compliant in their sector of the service industry business.
IRS Document Resources:
- Reporting Tip Income: IRS Publication 531
- Employee’s Daily Record of Tips and Report to Employer: IRS Publication 1244
These documents are an excellent resource for all service industry businesses, including bars, restaurants, and hotels. They are sure to help you avoid any future tax reporting issues.
Looking for More Information on Reported Tips for the Service Industry?
You can be comfortable knowing that reported tips are discretionary payments made by customers to employees. Customers pay by cash, credit, or non-cash items such as tickets, tip pools, or indirect tips from other employees. A tip must always be voluntary, and the full amount of the tip can not get negotiated.
If you have any other ideas or suggestions on topics regarding reported tips for employers and employees in the service industry, feel free to leave a comment in the comments section below. You can also search for other related articles in the search bar at the top of the page, and don’t forget to connect with us on social media.