Are you running a restaurant business where your employees stand to be remunerated partially via tips? The tips which employees earn are subject to withholding tax, which means that employers should report them. Below are some guidelines and procedures for doing this.
Taxes For Tips Which Are Allocated
Employers that operate a business specializing in food and beverages must offer allocated tips to their employees whenever the full amount of tips during a pay period are no more than 8 percent of the gross receipts of the business for the period. This law is for food or drinking establishments that employ more than ten workers, is located in the continental U.S. or where tipping is customary. Tips which are allocated are exempt from tax withholding.
However, allocated tips must be reported under box 8 on the W-2 Form of each worker. Additionally, employees should make use of the Form 4137 to determine the taxes owed for Medicare and Social Security for their tips that are allocated. This form should only be used to determine tax owed for tips that were not reported to employers.
Taxes For Service Charges
The service charges which are placed on a client’s bill are seen as being separate from tips. Examples of service charges include delivery fees, bottle service fees and charges for large parties. These fees should not be reported as tips, but they are still subject to both FICA and income taxes.
Taxes For Tips Which Are Reported
F&B workers can and often do receive tips directly from clients. These tips may be placed on credit cards or may be a part of a tip pooling arrangement. A worker that receives more than $20 worth of tips in 30 days are required to report these to their employer. They can do this by filling out Form 4070, which is called the Employee’s Report of Tips to Employer. The tips earned by employees within a given month must be reported by the tenth of the following month.
Any tips which are reported are subject to taxation. Employers are responsible for withholding taxes for both tips and standard wages. Tips also fall under Medicare, federal income tax withholding and social security. Depending on the state tips may also be subject to state taxes as well.
Employers must withhold income taxes which are unpaid from the paychecks of their workers, until the end of the year. At the same time, when there are taxes for Medicare or Social Security which are unpaid by the tenth of the month after the month when an employee first reported the tips, employers don’t have to collect the taxes. The uncollected amount should instead be noted on Form 941 as an adjustment. In case an employer cannot collect all of the taxes before the year ends, employees may need to set up estimated tax payments.
In the event where an employee doesn’t have sufficient wages to withhold all their taxes, employers should withhold taxes in the following order: Medicare and social security taxes, income taxes, any local or state taxes that are placed on wages, Medicare and social security taxes for tips, income taxes for tips and local and state income taxes for tips.