October 19, 2015

Denver Tax Attorney   What Employees and Employers Need to Know About Reporting Tip IncomeTips are defined as payments made by customers without compulsion. In most restaurants throughout the country, servers receive tips from the customers that they serve. Customers are entitled to determine the amount of their tips. Other restaurant employees who typically receive tips in addition to their hourly wages include bussers, food-runners, bartenders, hosts, and cashiers.

When it comes to reporting tips to the IRS, the government has outlined a strict set of policies for both employers and employees. Just like any other wage, the IRS recognizes tips as supplemental pay subject to full taxation. This means that all restaurant employees are required to report and pay taxes on their wages – including tips.

What do employers and employees need to know about reporting tips to the IRS?

Employee Responsibilities

Employees who work in an industry where tips comprise most of their income must accurately report their earnings to their employees on a monthly basis. They are required to keep a log of how much in both cash and credit tips are earned each day, and they must add up all entries and submit the total amount to their employer every month.

Employees who receive more than $20 in tips a calendar month must report all tip income on a written statement to be given to their employer. An employee must sign this document, and must include information such as the employee’s name, address and social security number, the employer’s name and address, the period or month that the statement covers, and the total amount of tips received. No report is required for a period where an employee receives less than $20 in tips a month.

Employees may use Form 4070 unless otherwise specified by their employer, but must also keep a record of the date and value of non-cash tips received. These include passes, tickets, and other items of value. Although these non-cash tips need not be reported to their employer, they must be reported on the employee’s tax return.

Employer Responsibilities

Primarily in order to avoid in-house underreporting issues, restaurant managers and employers set stringent requirements when it comes to reporting tips. Employers must take several steps to ensure that they are following the law and properly doing their jobs.

First, employers must receive a tip report from each tip-receiving employee for every payroll period – or more often, if needed.

Employers must also withhold FICA and income taxes from every employee’s salary, and then report the tips of each employee to the IRS. Each month’s tips should be reported by the 10th day of the month after the month the tips were received.

To report employee tip income, all employers operating large food and beverage establishments need to file Form 8027 at the end of the year. For tip reporting and allocation purposes, the IRS defines a large food or beverage establishment as a business or trade where food or beverages are offered for ingestion on the premises, where it is considered customary to tip, and where more than 10 employees are normally employed on a typical business day in the previous calendar year.

Employers must see to it that the overall tip income reported by employees during any period amounts to at least eight percent of the gross receipts from food and beverage sales for that pay period. If the total amount of reported tips is below eight percent of the total sales, then the employer or manager must allocate the non-taxable difference to employees in the form of extra wages.

Finally, employers must also take on the task of educating their employees on the importance of accurately reporting their tips to managers. It is against the law to falsify tip income, and an employee or restaurant may face penalties such as fines or even jail if it can be established that tip income is not properly reported.

 

Categories: Blog, IRS, Tax Tips