Restaurant owners, what is the perfect recipe for reporting employee tips?

The logistics of reporting gratuities can be a daunting payroll management and accounting issue. Here are some guidelines to help understand the process.

For Employees

Service employees earning tips are required to report that income to the IRS, but employees know that the more they report the less they take home. Many times, the cash in their pocket is often overlooked when calculating their earnings. A few important notes about the importance of accurately reporting their tips:

  1. Benefits depend on it. How much your employees are awarded if they ever file a disability claim depends on how much income they’ve reported. The same reasoning applies to social security benefits as well, or their ability to obtain a loan.
  2. Penalties abound.Encourage your workers to understand the risk involved with under-reporting tips. They might take home more today, but if the IRS ever discovers their bending of the truth, they’ll end up paying what they owed, plus penalties.

For Employers

Although it is not the employer’s responsibility to report tips collected by employees, there are some responsibilities of the employer to ensure the accuracy of payroll reports.

  1. Tips versus Service Charges. Restaurants that include an automatic gratuity on large parties are not obligated to give this money to the server. But service charges have to be reported differently to the IRS. According to the IRS, in order for the amount to be considered a tip rather than a service charge, a few things must be considered:
    1. The tip must be made freely by the customer
    2. The customer must have unrestricted right to determine the amount
      The customer has the right to determine who receives the payment
  1. Tax penalties.Tips made by credit card will show up in the event of an audit, although cash tips will not. If these tips are not reported, the restaurant may face additional taxes and penalties for failing to report these charges as tips.

The employer plays a critical role.

It’s important to advise your staff of the proper guidelines for tip reporting. This involves your complete and correct understanding of the guidelines. A good idea would be to include a “tip reporting info sheet” in your employee’s initial enrollment paperwork.

Here are some details you might include in such a report:

  • IRS Form 4070is the proper document used for tip reporting. Include one in their employee packet. The employee will use this form to report their tips to you, their employer.
  • Explain pooled tips.For example, if your server collects $100 in tips and “tips-out” a busser $20, they must report the difference, which is $80.
  • Service charges are not tips.If you have a policy of charging customers a set amount to cover gratuity, then it becomes regular income, not a tip.

As much as these guidelines can simplify matters and equip you to broach the topic of tip reporting with your staff, they should not substitute for professional payroll management advice. Rather than try to downplay the importance of proper tip reporting, help your workers make wise choices.



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