Kelly Bullis: Tip income rules
As we role up on another Labor Day, I thought it might be helpful to review the rather complicated rules relating to tip income.
The IRS has fought a hard battle, and mostly won, regarding getting tipped employees to report at least some part of their tip income on their tax returns.
I get it, if you receive tips, you may think they are just “gifts” and not income. Well, if you wait on a table, do a real good job of taking care of a customer and they only leave a dollar as a tip, do you say to yourself, “I worked hard and deserve a bigger tip than that!” then you can see, it is not a “gift” but “earnings.”
Tips are defined as: 1. Cash tips received directly from customers; 2. Tips from customers who leave a tip as part of their electronic payment for the business services they receive; 3. The value of any noncash tips, such as tickets, or other items of value; 4. Tip amounts received from other employees paid out through tip pools or tip splitting arrangements.
The traditional tip earners are obviously restaurants, hotel/casino employees, but don’t forget the limo/share drivers, valet parking attendants, beauty salon folks, etc.
All tip earners must keep a log of their tips, report their tips to their employer on form 4070 at least monthly, and report all tips received on their annual income tax returns.
All employers must keep a copy of all employee tips reports, withhold income and Social Security/Medicare taxes on tip income, educate all tip employees of their responsibilities, and report the tips on quarterly and annual payroll forms.
Here’s an additional burden on employers. They must look at all tips reported by employees monthly, and compute if they equal or are greater than 8% of all gross receipts. If not, then the difference between the amounts reported as tips and that minimum 8% amount are allocated to all tipped employees as additional tip income.
If you are considered a “Large Employer,” you must file an additional annual form 8027. The IRS defines a “Large Employer” as having the following characteristics: 1. Located in the United States; 2. Have food/beverages provided for consumption on their premises (not counting fast food joints); 3. Tipping is a common practice; 4. Have more than an average of 10 employees working on a typical day for the entire year.
Benefits of reporting tips to the employee include: Tipped employees… 1. Have more income to use in applying for loans; 2. Have higher Social Security earnings used in computing future Social Security benefits; 3. Have higher “wages” to compute potential unemployment benefits.
Lastly, what does an employer do with mandatory “service charges” applied usually to a large party’s bill? First rule to remember is that it is not “voluntary,” but a compulsory fee charged to the customer. Thus, when “service charges” are split among the employees who worked that large party, they are considered regular wages for that employee, not tip income.
Did you hear? Prov 12:17 says, “Whoever speaks the truth gives honest evidence, but a false witness utters deceit.”
Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 882-4459. On the web at BullisAndCo.com Also on Facebook.