HOW TO REPORT TIPS PROPERLY
Many years ago, tip reporting was easy and owners typically would tell their accountants or payroll company to just report tips up to whatever the minimum wage was at the time and that was sufficient.
This was a good deal for the restaurant owner because the more tips reported the more taxes he pays and it was a good deal for the tipped employee because the fewer tips they reported, the fewer taxes they would pay also.
As years passed, though, the IRS figured out that the taxes on underreported tips was a big source of revenue and got better at tightening the screws to force more tip reporting.
First, there was the 8% Tip Reporting Law. If you were a large restaurant, you were required to file Form 8027 which reported credit card sales and credit card tips, cash sales and cash tips. From that report, if your tips were not at least 8% of total sales you could expect a very costly audit. Those audits scared many owners into reporting more tips.
Then there was Form K-1 which was a report generated by the credit card companies which went directly to the IRS. That form could be used to match sales and tips reported on credit cards to what you reported on your tax returns. The IRS uses that information to audit restaurants more aggressively.
When you get audited for tips and the IRS finds a shortfall, the restaurant owner is the one who pays taxes, penalties, and interest on the underreported tips – not the employee. And the IRS can go back three years.
In today’s world with POS systems that maintain all tip information, the IRS is not accepting any excuses for not reporting properly.
We advise our clients to:
- Post a statement that all tips received by a tipped employee (including bussers and bartenders) must be reported each pay period. That is the law.
- Sometimes getting employees to report cash tips is difficult but each employee should report some cash tips before they get cashed out after their shift.
- You should have a record of what they are reporting in cash either in the POS on a Cash Tips Reported Form each shift.
- Do not report only sufficient tips to meet minimum wage. This could really cost you if you are audited.
- Do not report a dollar amount per hour such as $6.00 or even $10.00. By you reporting a dollar amount you have taken the responsibility off the employee and put it squarely on yourself.
- The positive side to tip reporting is that there is a generous tax credit that owners receive which is based on the amount of tips their employees report. The tip credit will reduce your income tax liability.
If you have any questions regarding tip reporting, call your representative at Kallas.