Reporting Tips to the IRS
For many employees that work for tips, the process of what to report and how to report can often be riddled with misinformation passed down from one employee to another, like a bad game of telephone. The process can be somewhat confusing and often overwhelming, depending on how your employer decides to handle the tip situation. Best case scenario, your employer hires a payroll service which records your daily tips and other wages, then collects the proper taxes that need to be withheld and paid to the IRS. Worst case scenario, you must report your tips yourself to your employer via IRS Form 4070, which means you must be much more organized.
If your employer has contracted the services of a payroll vendor, reporting tips is just part of the process your company goes through when submitting payroll. Any tip left via credit or debit card leaves a paper trail, so it is vital for your employer, for their sake and yours, to report these wages. Then there is the old myth of what percentage of your tips need to be reported…. the correct answer is 100%. Most people are surprised and even shocked when they read this fact. Here is the verbiage posted on the IRS website:
“All cash and non-cash tips an employee receives are income and are subject to Federal income taxes. All cash tips received by an employee in any calendar month are subject to social security and Medicare taxes and must be reported to the employer, unless the tips received by the employee during a single calendar month while working for the employer total less than $20. Cash tips include tips received from customers, charged tips (e.g., credit and debit card charges) distributed to the employee by his or her employer, and tips received from other employees under any tip-sharing arrangement.” As you can see, the term “ALL” is used when referring to cash and non-cash tips.
Now let’s examine what happens if you need to track your tips yourself, which again, can be a much more problematic. Organization is the key here, because that payroll company that your employer is not using, has software that is designed for that exact purpose. Since the IRS requires you to report your tips monthly to your employer, IRS Form 4070 is made available. This form must be maintained daily and then given to your employer, who then uses that information to withhold the proper amount of taxes. Failure to report these taxes can result in a 50% penalty of the Social Security and Medicare taxes you owe.
Tipped employees, such as waiters, receive both an hourly wage and tips, and taxes must be paid on both. Since most tips are paid out at the end of each shift, no taxes are withheld, but again, they are owed. So, when said server is paid their hourly paycheck on payday, the amount quite often is not enough to cover the amount of taxes owed on the tips. In this instance, withholding carries over to the next pay period or the employee can elect to make a payment in the proper amount to the employee for taxes owed.
Charlotte Payroll provides, as standard, our payroll tax filing services. We will draft and via EFTPS submit all taxes when due. Our tax penalty guarantee gives you peace of mind knowing your business is compliant! We have a team of dedicated professionals ready to assist you with all your payroll, time and attendance, and HR needs. We offer a full in-the-cloud experience that maximizes efficiency. Our SaasHR platform can be tailored for any size business to run on any device. Process payroll in minutes with our solution so you can get back to running your business. Call us today at 704-887-5511.
