by Michael Lodge
We have business clients that have restaurants the issue of how to report tips and the taxes on them always come up. What does the employer need to report and what is their responsibilities. Especially when it has to deal with Social Security, FICA, Medicare and other issues.
Question: As an employer, do I have any liability for social security and Medicare taxes if my employees receive tips but don’t report them to me?
Yes. Employers in industries where tipping is common know that they must report and pay taxes on tips employees report to them. However, many employers do not realize that they are liable for the employer share of social security and Medicare taxes on tips employees do not report to them.
- Tipped employees are required to report their tips to their employers by the 10th of the following month if they receive cash tips of $20 or more in the month. Cash tips include tips they receive directly from customers, charged tips (e.g., credit and debit card charges) you distribute to them, and tips they receive from other employees under any tip-sharing arrangement. Thus, both directly and indirectly tipped employees must report tips received to their employer.
- You, as an employer, must withhold and pay the employee share of social security and Medicare taxes on tips your employee reports to you to the extent the employee’s non-tip wages or funds the employee provides you are available. You must also pay the employer share of social security and Medicare taxes on all reported tips.
- For unreported tips, your liability for the employer share of social security and Medicare taxes does not arise until the Service issues you a Section 3121(q) Notice and Demand. The tax due shown on the notice and demand may be based on tip audits, data from Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips, or Forms 4137, Social Security and Medicare Tax on Unreported Tip Income. The employer is not liable to withhold and pay the employee share of social security and Medicare taxes on unreported tips.
- You must file Form 8027 if you operate a large food or beverage establishment. A large food or beverage establishment is a food or beverage operation located in the 50 states or in the District of Columbia that provides food or beverages for consumption on the premises and has employees who customarily receive tips. Additionally, the employer must normally employ more than 10 employees on a typical business day during the previous year. If you are the employer at a food or beverage operation, see theInstructions for Form 8027 to determine if you must file this form. You may also be required to allocate tips if the total tips reported to you are less than 8% of gross receipts. Report the allocated amount on the employee’s Form W-2, Wage and Tax Statement.
- Form 4137 is used by employees to report and pay their share of social security and Medicare taxes on tips they did not report to you. This should include any allocated tips shown on Form W-2, unless the employee has adequate records (a daily tip record or other credible evidence) to show that the employee did not receive the allocated tips.
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