A Heads Up to Restaurant Owners

The IRS has announced their intent to “to more closely examine the taxation of tips and service charges in 2014” (via Accounting Today).  Now, we all know that employees are reluctant to report all their tips, but with the additional scrutiny we are expecting we are advising our clients to be diligent in their efforts to assure compliance with tip reporting requirements.

The IRS has put together a Guide to Tip Income Reporting that you can hand out to your staff that explains the employee’s responsibility and answers frequently asked questions. A few examples:

Do I have to report all my tips to my
If you received $20.00 or more in tips
in any one month, you should report
all your tips to your employer so that
federal income tax, social security and
Medicare taxes, and maybe state in­
come tax can be withheld.

Do I have to report all my tips on
my tax return?
Yes. All tips are taxable income and
should be reported on your tax return.

I was told that I had to report only a
certain percentage of my total sales
as tips. Is this true?
No. You must report to your employer
all (100%) tips you receive, except for
the tips from any month that do not
total at least $0.00.

Sometimes I don’t get tips directly
from customers, but rather from
another employee. Do I need to
report those tips?
Yes. Employees who receive tips from
another employee are required to report
“tip-outs.” Employees often disburse
tips out of their earned tips to another
employee (tip-outs). Remember, all tips
are taxable income.

Do I have to report tip-outs that I
pay to other employees?
No. You report to your employer only
the amount of tips you retain. However,
you must maintain records of tip-outs
with your other tip income (cash tips,
charged tips, split tips, tip pool).

If you have any questions about how to comply or what is required, please don’t hesitate to give us a call. Unify has a unique specialty in restaurant payroll and our software is equipped to handle tip reporting, FICA tip credit, tip make-up, tipped overtime, and other restaurant payroll situations.


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