Taxing Tips for the Restaurant Employer

In the previous blog about employee tips, we noted that our city is host to many restaurants with tantalizing dishes and wait-staffs that strive to make patrons feel welcome and comfortable; and that we reward the experience at a fine dining establishment with a tip.  While that blog post focused upon taxing tip responsibilities for employees, this month, I’d like to discuss the taxing tip responsibilities for the employer.

Employer Tax Tipping Responsibilities

As an employer, you have multiple responsibilities regarding employee tip income.  You must maintain the tip reports of your employees, withhold their income taxes and their portion of Social Security and Medicare taxes, and then report all of this information to the IRS, as well as report your (the employer) income taxes and share of Social Security and Medicare taxes.

You first need to receive the record of tips from your well-trained employee.  After your employee has reported the tips she has received via written statement, you must verify the accuracy of her report.  Assuming she has been staying on top of her tip count and her report is legitimate, you can then begin inputting her figures to withhold her income taxes and her share of Medicare and Social Security taxes on IRS Form 941, Employer’s QUARTERLY Federal Tax Return.  Though it isn’t withheld from employee wages, you are also responsible for filing Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, and depositing the associated taxes.

Unreported Tips

However, some employees do not properly report their tips.  As the employer, you aren’t responsible for your share of Medicare and Social Security taxes on unreported tips until the IRS issues a notice and a demand for the taxes.  Even then, you are not liable to withhold and pay the employee’s share of Medicare and Social Security taxes on unreported tips.

Service Charges

Something to consider in tipping tax is the service charge, which is a fee placed on the customer by the employer. Sometimes called auto-gratuities, these fees are typical when a party has six or more guests and are designed to cover the extra work involved with serving a larger table.  Because these fees are assigned by the employer, service charges are always seen as income for the employer, even if they are split up between the staff.

Finally, employers who operate “large food or beverage establishments” must file Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips, to report their receipts from food and beverages to the IRS, along with any tips employees have returned to you as their employer.  You will also use this form to settle allocated tips – which are allocated among tipped employees.

Following these guidelines will help you to properly report and pay taxes on tip income received by your employees.

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Written by Robert V. Boeshaar

Robert V. Boeshaar

Robert V. Boeshaar is a Seattle tax attorney committed to helping individuals and small businesses who are facing problems with the IRS. He believes in using his experience to serve others and to make a difference in their lives.