What Employers Need to Know About Tips

What tips are taxable?

All tips are taxable!  Direct tips, charged tips, and pooled tips in the form of cash and noncash tips are taxable.  Yes, the value of noncash tips such as tickets, gift certificates, and any items of value are taxable.

What is the tipped employee’s role in reporting tips?

A tipped employee must do two main things pertaining to tips.  First, they must keep a daily tip record in the form of a tip diary, or they can keep copies of documents that show tips such as restaurant bills or charge slips.  Second, the employee must report all tips to the employer for every payroll period.  The employee can use IRS Form 4070 or an employer provided form to report tips.  Note: An employer provided form should include the following information: Employee’s name, employee’s address, employee’s S.S. number, employer’s name, period covered, date reported, total amount of tips received, and the employee’s signature.

What does the employer need to do with the reported tips?

The employer is responsible for withholding income and FICA tax on the tips through each paycheck.  The employer will also need to report the tips to the IRS on quarterly and year-end payroll tax returns and forms.

What is the FICA tip credit?

As an employer with tipped employees you also pay FICA tax on the employee’s tips.  The FICA tip credit is for the FICA tax paid on the wages plus tips that are above federal minimum wage.  The credit must be requested on the employers business tax returns using Form 8846.  The amount of the credit varies, but for most restaurants it is a significant amount.

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