Restaurant Employee Tips: Tax Reporting and Credits

As those in the restaurant business know, employers in the service industry have a unique set of tax rules that apply to them because many servers in this country make their money through tips. Whether you are a restaurant owner or employee, you are required by the federal government to report the tips distributed at your place of business.

Determining how to properly report tips to the IRS depends on your role, as servers and owners have different requirements for filing. Interactive Accountant’s restaurant tax professionals understand how important it is to properly report tips if you work in the restaurant and hospitality business.

Let’s explore the must-know information related to reporting restaurant tips and credits.

Are Tips Taxable?

Yes, tips are taxable income and must be reported when filing personal tax forms for employees and business tax forms for employers each year.

The IRS defines tips as:

• Any cash an employee receives directly from customers.
• Credit cards, gift cards, or other types of electronic forms of payments where a customer has input a tip to an employee.
• Non-cash tips such as “gifts” of entertainment tickets, merchandise, or other items of value.
• Tips from tip pools, tip splitting, or other tip-sharing arrangements implemented by the company where employees share their earned tips.

If an employee receives money or items of any value from customers, clients, or guests this income must be reported to their employer and to the IRS. Additionally, employers must accurately report earnings through tips for all of their employees. It is important to keep up-to-date restaurant accounting records of all tips acquired within your business.

Reporting Tips to the IRS

When it comes to reporting and paying taxes on employee tips, you must collect employee tip income reports for every single employee who works for your business. Generally speaking, most POS systems can do this for you, keeping your record-keeping streamlined and easy. However, if your restaurant or hospitality business operates by using a tip pool or another form of shared tipping arrangement, you must manually keep a record of these tip distributions and retain this information in your records for at least seven years.

While calculating your wage payments, you must withhold income taxes and FICA taxes on tip income. In general, the reporting process is pretty straightforward so long as you keep notes of your employees’ tips and report those tips to your payroll solution provider.

Tax Credits for Employers

When seeking tax credits for payroll taxes paid on tip income, it is important to report these income filings properly.

Provide your certified public accountant with the following information and documentation:

• All tip income is reported on employees’ W2 forms.
• Quarterly 941 reports, so that the actual amount of tips reported to the IRS is used when completing your tip credit application.
• Evidence that all employees are being paid at least a minimum wage salary.
• Verification of any wages filed on form 941 for any other credits (like the employer retention credit or PPP forgiveness) as those may not qualify for the tip credit.

It is up to the restaurant’s discretion just how they want to operate and to what degree they want to encourage tipping for their servers. It is important to keep your employees in mind when making these types of decisions so that they do not only benefit the business but everybody involved.

Contact Our Business Tax Accountants

Here at Interactive Accountants, we make it our mission to be an informed source in restaurant and hospitality tax preparation and are happy to answer any questions or concerns related to your business. We offer comprehensive planning, preparation, filing, and record-keeping services to business owners.

Call us today at (305) 517-3977 or schedule a free consultation with one of our knowledgeable CPAs today.