Taxes and Tipped Employees: What Restaurants Need to Know

tipped employees and taxes

Are you a new restaurant owner? If so, you probably have a lot of questions regarding handling the taxes of your tipped employees. Don't worry, we’re going to answer all your questions about taxes and tipped employees.

First things first, let’s take a look at the definition of a tipped employee.

tipped employees

Who counts as a tipped employee?

According to the U.S Department of Labor, a tipped employee is, “someone who is in an occupation in which he/she gets more than $30 a month in tips.”

A tip is defined as money that customers give directly to an employee, this could be from a credit card, debit card, or cash.

Tips are an ideal way for employees like bartenders and waiters to earn some extra money. However, reporting tip wages to the IRS come tax time can be complicated. After all, employers are legally accountable for paying tax returns on employee tip income.

Things You Need to Know About Taxes and Tipped Employees

How does tipped income affect employees' total wages?

All employees must be given at least the minimum wage set by federal or state law, including tip income. Keep in mind, employers are not permitted to use employee tips against the minimum wage except as a credit.

Minimum cash wage requirements differ by state, so make sure you check with your local authorities to make sure you’re compliant.

This difference between the required cash wage and the minimum wage is usually made up by tips.

First of all, you need to pay your tipped employees at least the minimum cash wage before tips are counted. Next, you need to ensure that your employees are reporting their tip income to you, the business owner.

The cash wage and the tip income reported must equal to at least the minimum wage standard in your state. If not, as an employer, you will need to make up the difference.

tipped employees tax return

Calculating tipped wages

For new restaurant owners, it can be difficult to calculate the tipped wages your employees receive.

Per the Fair Labor Standards Act, the federal minimum wage is $7.25 per hour for both tipped and non-tipped employees. However, different states may have different standards. So make sure to check your state’s law for the minimum wage.

Remember, the combined wages and tip of your employees must be equal to or greater than the minimum wage standards set by your state. Failure to meet minimum wage standards could land you in hot water, so always make sure you’re compliant with both federal and state labor laws.

Tax Requirements

As an employer, it’s your responsibility to check whether or not your tipped employees are required to pay taxes. Besides this, you also need to make sure you’re meeting the reporting, withholding, and payment requirements of the IRS.

Remember tipped employees can only be taxed if the tipped wages are more than $30 per month. If your employees exceed that amount, you are liable to withhold income, medicare, and Social security taxes from those wages.

In addition to this, you will need to pay the employer’s portion of FICA and FUTA taxes on the tips.

Reporting to The Internal Revenue Service

You’re required to report all of your employees’ income (including tips) to the Internal Revenue Service.

As most restaurant employees receive tips as cash, it can be challenging to report the exact amount of tips they earn. To ensure your employees are reporting their correct earnings, enforce a rule of submitting tip reports for every tipped employee at the end of every pay period. It will help you keep better track of what they’re earning in tips.

Form 8027

If you run a large-scale food or beverage business, when it comes time to submit your taxes for tipped employees to the IRS, you’ll need to do with the form 8027.

According to the IRS, a restaurant must fill out the 8027 if:

  • Tipping is customary for your employees
  • You employee 10 or more workers on a typical business day

Eight Percent Rule

IRS says that a minimum of eight percent of a worker’s gross income can be submitted as tips. Most restaurant owners stick to this eight percent threshold even though many restaurant employees earn 15 to 20 percent tips per check.

Reporting Credit Card Tips

For restaurant owners, it’s much easier to keep track of credit card tips. After all, every credit card transaction is processed and managed by a Point of Sale System, which enables employers to see detailed reports of every tip employees receive.

Since restaurant owners can keep track of the total amount of credit card tips received by each employee, they can do hassle-free tip income reporting. It can also help you more accurately report state and federal tax deductions.

You can also use the tax form 4070 A to keep the record of tips your employees are regularly receiving.

Here’s some additional information you’ll need when reporting tipped wages:

  • Employee’s name and address
  • Social security number of employee
  • Period the report covers (Maximum 1 Month)
  • Total tips received (Both direct or indirect)

Final Thoughts

Keeping track of every tip your employee receives isn’t easy. But, as a restaurant owner, it’s your responsibility to report it to the IRS. If you keep these tips in mind handling the tax requirements of your tipped employees will be a breeze.

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