Businesses in certain industries have employees who received tips as part of their compensation. These businesses include salons, hotels and restaurants.
Tips are discretionary payments that customers make to employees who perform services. They can be received directly from customers, electronically paid to employees by employers and tips received from other employees.
Regardless how the tip is received, employee tips have tax implications.
Employee Tips Tax Implications
Businesses like restaurants face unique tax responsibilities regarding tipped employees and reporting. Tips allow employees to receive extra income in addition to their salary. But when it comes to how tips are taxed, business owners are often presented with many challenges.
For tax purposes, there are 4 factors that determine if a payment qualifies as a tip:
- Customer generally has the right to determine who receives the payment.
- Payment is not dictated by or negotiated with employer policy.
- Customer has the unrestricted right to determine the amount.
- The customer voluntarily makes the payment.
Daily Tip Records
Another employee tips tax implication is that daily tip records must be kept by employers. To keep track of them, they can use Form 4070A, Employee’s Daily Record of Tips, found in IRS Publication 1244.
Although the IRS does not require employees to report non-cash tips to employers, they must report them on their tax returns. So, keeping good records of non-cash tips is also important.
Reporting to Employers
Employee tips tax implications can also include the employee not reporting tips in a timely manner. This opposes a problem for employers because employees must report tips to employers by the 10th of the month. For example, if the employee received tips in May, they must bereported to the employer by the 10th of June.
However, there is no designated form required by the IRS that the employee should use to report their tips.
Note: If tips are less than $20, the employee is not required to report it to the employer. However, the employee must include them as income on their tax returns.
Tip Tax Credit
Are you an employer with tipped employees providing food and beverages? Then you might qualify for a federal tax credit. This involves the Social Security and Medicare taxes that you pay on employees’ tip income. If you have questions about employee tips tax implications, don’t hesitate to contact us.
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