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What Restaurant Owners Need to Know About IRS Tip Reporting

The restaurant industry has its own set of tax laws tied to it that no other industry will ever know. HR managers and restaurant owners alike must always stay current with changes and be well-versed with laws already in place.

TEFRA (Tax Equity and Fiscal Responsibility Act of 1982)

In 1982, Congress passed TEFRA with the intent to generate additional revenue by cutting government spending, increasing taxes, and reforming measures. One area targeted for change was tip reporting. Before TEFRA was enacted, the IRS stated that only 16 percent of restaurant and bar employees were accurately reporting their tip income. In an effort to reform this, the IRS has put tip income under heavy scrutiny and requires employees and employers to do their part in the reporting process.

What are tips?

Discretionary (optional or extra) payments determined by a customer receiving a service given to employees conducting that service. This can include the following:

  • Cash
  • Credit card, debit card, gift card, or other electronic payment
  • Items of value (noncash)
  • Tip amounts received from tip pools or tip splitting (informal tip sharing arrangements)

Tips are considered a form of income and are subject to Federal income taxes as well as Medicare, Social Security and State taxes.

Tip Reporting Requirements for Employees

  1. Keep a daily tip record using Form 4070A, Employee’s Daily Record of Tips
  2. Report tips to employer, unless less than $20, in a written statement. This statement must include employee’s name, address, and SSN; employer’s name and address; month or period the report covers; total tips received during that month or period.
  3. Report all tips on an individual income tax return, Form 4137, Social Security and Medicare Tax on Unreported Tip Income

Tip Reporting Requirement for Employers

As mentioned previously, employees and employers both have a responsibility in tip reporting to meet compliance! The obligations employers hold are:

  1. Retain employee tip reports
  2. Withhold employee income taxes and employee share of social security and Medicare taxes based upon wages and tip income received*
  3. Report this information to the IRS*
  4. Pay employer share of the social security and Medicare taxes based on the total wages paid to tipped employees as well as the reported tip income
  5. Please refer to the IRS Tip Recordkeeping and Reporting page for more information

**Taxes are withheld and reported on the returns Payroll Systems files.

Allocation of Tips

If you are an employer who operates a large food or beverage establishment (stores, outlets, cost centers, venues are a few typical names to refer to these establishments), you must file Form 8027.

Usually, employers with 10 or more employees who work and earn tips on a typical business day are considered a larger operation. If your establishment has multiple locations where food and beverages are distributed, each location is required to submit a separate Form 8027. Refer to the IRS’ Form 8027 Instructions for more detail.

8 percent of gross receipts is the minimum of total tips that must be reported during any payroll period at any large food or beverage establishment. If less than 8 percent is reported, employers are required to allocate the difference among the employees who receive tips.

Please note Payroll Systems offers Form 8027 assistance, but we do not file on our clients’ behalf.

For current Payroll Systems clients, contact your client manager if you have any outstanding questions. If you want to find out more about Payroll Systems services, please fill out the form below!

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This article provides general information and shouldn’t be construed as legal or HR advice. Since employment laws may change over time and can vary by location and industry, please consult a lawyer or HR expert for advice specific to your business. You can also contact Payroll Systems to inquire about our HR support services.