Employers with employees who receive tips have a unique pay and tax situation. If you have employees that are getting tipped, you need to know how to handle the taxes and payment on those tips. While this can add a bit more confusion to your payroll process, it is important that your business complies with IRS tip reporting guidelines.
Here’s some important information regarding tip recording and reporting:
What are Tips?
Tips are optional or extra payments determined by a customer that employees receive from customers. Examples of tips you must report include:
Cash tips received directly from customers
Tips from customers who leave a tip through electronic settlement or payment. This included a credit card, debit card, gift card, or any other electronic payment method
The value of any noncash tips, such as tickets or other items of value
Tip amounts received from other employees paid out through tip pools, tip splitting, or other formal/informal tip-sharing arrangements
What do Employees Need to do with Tips?
As an employee who receives tips, you have a few different responsibilities. One of these includes keeping a daily tip record. Employees can use Form 4070A, Employee’s Daily Record of Tips, to record their tips.
Employees will also need to report the tips they receive to their employer. If the tips the employee received from any month do not total at least $20, they do not need to be reported. When reporting tips, you should include the following information:
Employee’s name, address, and social security number
Employer’s name and address (establishment name if different)
Month or period the report covers
Total of tips received during the month or period
An employee can use any document that has the above elements such as Form 4070 or a document/system your employers provide you to record your tips. With PayWow, each employee can report their cash tips directly which will allow you to have a much easier time processing and running your payroll. Employers can also choose to report their employee’s tips for them. Regardless of which you choose, once you report your tips, they will be seamlessly integrated into the payroll.
Lastly, the employee must report their tips on an individual income tax return. An employee must use Form 4137 to report the amount of any unreported tip income to include as additional wages on their Form 1040 or 1040-SR, U.S. Individual Income Tax Return. They must also report their share of Social Security and Medicare tax owed on those tips.
When to Report Tips to your Employer
If an employee receives $20 or more in any month, they must report their tips for that month to their employer by the 10th day of the next month. An employer may require employees to report tips more than once a month; however, the statement cannot cover a period of more than 1 calendar month. The employer must withhold federal income, Social Security, and Medicare taxes on the reported tips.
Charges added to a customer’s check, such as large parties, by your employer and distributed to you are known as service charges. If your employer adds a service charge to a customer’s bill, it does not constitute as a tip.
As an employer, you have many different responsibilities regarding employee tip income. These include reporting responsibilities, recordkeeping, collecting taxes on tips, filing certain forms, and paying or depositing taxes.
Employers are required to keep a record of their employee’s tip reports. Employers are also required to withhold taxes (including income taxes and the employee’s share of social security tax and Medicare tax) based upon wages and tip income received by the employee and to deposit this tax. Employers must also pay their own portion of social security and Medicare taxes based on the total wages paid to tipped employees as well as the reported tip income.
Employers must report income tax, social security, and Medicare taxes withheld from their employee’s wages and the employer share of social security and Medicare taxes on Form 941, Employer’s Quarterly Federal Tax Return, and deposit these taxes pursuant to federal tax deposit requirements.
With PayWow, integrating tips into your payroll is simple. You can create a list of all of your tipped employees and have a tip log where they can report their tips. Once a tip is recorded, it will be automatically integrated into your payroll. PayWow makes payroll simple for every industry.