The indeterminate nature of tips can make complying with the IRS a tough job for restaurant owners. Though employees are required to claim all tip income received, it can be tough to pinpoint this exact amount if employees neglect to keep an accurate log of daily tips. In order to accurately withhold Federal and State income tax as well as the FICA tax (details in our previous blog) from employees’ income, employers need to keep abreast of all wages received by employees each payroll period.

3 responsibilities for tipped employees

1. Record tips in a daily log.
2. IRS Publication 1244 includes Form 4070A, Employee’s Daily Record of Tips which must be maintained by employees on a daily basis. A record of dates and values of any noncash tips like tickets, passes, etc., is also required of your employees. These are items that must be disclosed on their tax returns. Give employers an accurate report of tips unless you made less than $20.
   • Employees are required under Internal Revenue Code to report all cash tips per month that exceed $20, in the aggregate. Tips, for these purposes, include any cash tips from customers, credit and debit card charged tips allocated to the employees, and tips received from a collective tip jar shared by employees. There is no official form used for this monthly report, but it must include:
     • Employee’s name, address and social security number
     • Your name, or the restaurant’s name, and address
     • Month tips are received
     • Total tips received during that month
   • In addition to this, most point of sale / time entry systems allow employees to report their tips for the day when clocking out of their shift. This makes it easier for employees to maintain records.
3. Report tips on an individual tax return. Form 4137, Social Security and Medicare Tax on Unreported Tip Income must be filed by all employees to report amounts of any unreported tip income. This information is then used to fill in the “additional wages received” portion on the employee’s 1040. Keep in mind that this is only applicable to tips that were not reported to your employer and already included on your W-2 statement.

Responsibilities for employers

As employer, you must retain employee tip reports and analyze wages and tip income received by employees to decide both the amount of income taxes that should be withheld, and what share of social security and Medicare taxes should be allocated to employees. Based on the uncertain and fluctuating nature of tips, it is your responsibility to keep accurate records of the month to month tips received by employees in your establishment. Tracking tips can keep you on good terms with the IRS to prevent expensive tax penalties.

Tipped minimum wage debate in RI

Rhode Island’s tipped minimum wage is currently $2.89 per hour and is under debate by business owners in the state on whether or not it should be raised to $4.50. Taking into account the already high compensation of many restaurant employees through tips, it is no wonder why business owners are divided on the issue.

Many employees in the industry are making well over RI’s $9.00 minimum wage and are not accurately reporting this income to employers and the IRS. It is important to instruct your employees on proper reporting and recordkeeping requirements to avoid this problem and to make it easier for restaurant owners to decide if the tipped minimum wage should indeed be raised.

For more information on tip reporting requirements, refer to IRS Publication 1244.

Questions? Contact any member of our Hospitality Services Group.