Have employees who receive tips? Here are the tax implications
Updated: Apr 5
What are tips? Tips are bonuses that customers pay to employees for a job well done. They can be in cash form, such as directly from the customer, electronically via the employer, or from tip-sharing among employees. Cash tips must be reported to the employer, while non-cash tips, like tickets or passes, do not have to be reported but should still be recorded for tax purposes.
For a payment to qualify as a tip, it must be voluntarily given by the customer, the customer determines the amount, it's not dictated by the employer, and the customer chooses who receives it.
Tips can also be direct or indirect. Direct tips go directly from the customer to the employee, like wait staff, bartenders, and hairstylists. Indirect tips go to employees who don't normally receive them, like bussers, service bartenders, and salon shampooers.
Record Keeping Tipped employees must keep a daily record of the cash tips they receive and record the dates and values of non-cash tips for tax purposes, even though they don't have to be reported to the employer.
Reporting to Employers Employees must report their tips to their employer by the 10th of the following month. The report should include the employee's name, address, Social Security number, and signature, the employer's name and address, the period covered, and the total tips received during the period. If the employee's monthly tips are less than $20, they do not have to be reported to the employer but still must be included as income on the tax return.
Employer Responsibilities Employers must provide each employee with a Form W-2 that includes reported tips and also:
• Keep their employees' tip reports. • Withhold taxes, including income and Social Security and Medicare taxes, based on the employee's wages and reported tip income. • Pay their share of Social Security and Medicare taxes. • Report the information to the IRS on Form 941. • Deposit the withheld taxes according to federal tax deposit requirements. • "Large" food and beverage establishments must file an annual report on Form 8027 disclosing receipts and tips. Tip Tax Credit Employers in the food and beverage industry with tipped employees may qualify for a federal tax credit for the Social Security and Medicare taxes paid on employees' tip income. If you have any questions about the tax implications of tips, don't hesitate to reach out for assistance.
In conclusion, understanding the rules and regulations around tips and taxes can be a daunting task, but with the right information, it doesn't have to be!