Am I Handling Employee Tips Correctly?
Tracking and reporting employee tips is one of the most complicated reporting requirements for employers, but if you own or manage a business where employees receive tips, you need to know what is required. While the employee is required to report tips to the employer, the employer is required to educate and train employees how to report tips. Coordinating these two responsibilities can be tricky so it’s good to know the rules.
An employee must:
1. Keep a daily tip record.
2. Report tips to the employer unless the total is less than $20 per month.
3. Report all tips on an individual income tax return.
An employer is required to:
1. Retain employee tip reports.
2. Include the tips as income to the employee.
3. Withhold the appropriate payroll taxes on the tip amount.
4. Report the tips appropriately on payroll tax reports and the employee’s year-end W-2.
The IRS estimates that 84% of tips are underreported which makes tip reporting an easy target in an IRS audit. To meet the requirements, it is extremely important to work with a payroll expert who specializes in tip reporting and compliance. Let us know if you need help in this area.
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