What Should You Know About Reporting Employee tips?
Keep these “tips” in mind as you manage your payroll and income tax reporting responsibilities for employee tips.
Your employees are responsible for giving you accurate tip reports. Underreporting is not acceptable. But even if you know their numbers are wrong, you cannot change them without jeopardizing your tips credit. What should you do?
- 1. Talk to your employees often about the importance of reporting tips accurately. The IRS requires that they keep a daily log, and can reconstruct the tips of employees who don’t have records.
- Remind them that if IRS auditors come calling, they will compare their tips to those of other employees and to credit card tips. Employees reporting unreasonably low tips could be liable for back income and FICA taxes, interest, and penalties.
- Let them know that underreporting income may reduce their benefits when applying for unemployment and social security.
The IRS recommends paying credit card tips through payroll
The IRS recommends including credit card tips in employee paychecks instead of paying them out in cash. You must report all credit card tips in the next regularly-scheduled pay period if you use this method, which can prevent zero paychecks. When an employee’s paycheck is zero (which occurs when cash wages don’t cover payroll taxes withheld on tips when added to wages), you must observe specific ordering rules for withholding. Also, tell your employees if you couldn’t withhold all required taxes, or they may be shocked to owe the IRS when they file their tax returns.
Claim the tips credit
You are entitled to the tips credit if you paid social security and medicare taxes on employee tips. Calculate it on Form 8846 using the $5.15 per hour rate frozen for this purpose, not the current minimum wage (which changed on July 1, 2009).
The IRS extended its Attributed Tip Income Program (ATIP) through 2011. Originally set to expire after 2009, ATIP offers employers a reporting alternative designed to encourage compliance with tip income mandates, reduce disputes on audit, and reduce filing and recordkeeping requirements. If you qualify, you can use an IRS-approved formula to calculate the tips you report on Forms W-2. You may want to consider ATIP if you allocate tips. The requirement to allocate tips depends on the number of tipped workers and their hours.
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