Restaurant owners face many responsibilities in regards to employment tax and reporting obligations with tipped employees. According to the United States Department of Labor, a tipped employee is one who “engages in an occupation in which he or she customarily and regularly receives more than $30 per month in tips.” A tip is given directly to the employee by a customer or client. By law, employers are not allowed to take or benefit from an employee’s tip. Tipped employees appear often in the service industry — waiters, bartenders, hair stylists, bellboys, and many more. Tips are a great way for employees to make money, but having tipped employees can pose a unique set of challenges for business owners, especially when it comes to payroll and taxes. Read below to find out more about three such challenges.
It can be tricky to calculate wages needed for tipped employees. Under the Fair Labor Standards Act, the federal minimum hourly wage is $7.25. An employer who has properly notified employees in advance is permitted to take a tip credit toward the minimum wage obligation equal to the difference between the required cash wage (which must be at least $2.13) and the federal minimum wage. However, tipped employees must still be paid at least $7.25 per hour, including cash wages and tips. If an employee does not make that much, the employer is required to make up the difference in cash. State requirements may differ.
Employers with tipped employees are required to report all of their income to the IRS — including tips that employees receive. However, because many employees receive their tips directly in cash, they can be reluctant to report this income to employers in an effort to avoid being taxed. To make sure that your employees report the accurate amount of tips they receive, have each employee submit a “tip report” for each payroll period. Having your tipped employees record the cash they earned during their shift prior to clocking out can help you keep better track of what they’re earning and efficiently report your company’s income and wages to the IRS. As an employer, it is recommended, but not required, to document a daily record of tip income with the Form 4070A, Employee’s Daily Record of Tips.
If you’re an employer with tipped employees, your employees’ tips may constitute taxable wages for payroll tax purposes. You may have more requirements come tax time, including withholding, reporting, and payment requirements. Tips are not taxable unless an employee makes more than $20 per calendar month. If your employee does make more than $20 in tips per month, you are responsible to withhold income, Social Security, and Medicare taxes on reported tips. You are also required to pay the employer’s portion of FICA and FUTA taxes on the tips.
Processing payroll and keeping up with tax requirements at your restaurant can be complicated, but it doesn’t have to be. For more information on the requirements you have as an employer on additional payroll tax withholdings and reporting, learn more here.