Tax Topic #761 |
2008 Tax Year |
Topic 761 - Tips � Withholding and Reporting
Your employees who receive tips of $20 or more in a calendar month, while
working for you, are required to report to you the total amount of tips they
receive. They must give you written reports by the tenth of the following
month. Employees who receive tips of less than $20 in a calendar month are
not required to report their tips to you.
Employees must report to you tips received directly from customers, tips
from other employees, and tips customers charge to their bills. Service charges
added to a bill and paid to your employees are not considered tips for tax
reporting purposes. These service charges constitute wages for purposes of
social security, Medicare, and income taxes.
Employees can use Form
4070A, Employee's Daily Record of Tips, to keep a daily record
of their tips and Form
4070, Employee's Report of Tips to Employer, to report their
tips to you. Both of these forms are in Publication 1244 (PDF), Employee's Daily Record of Tips and Report to Employer.
When you receive the tip report from your employee, use it to figure the
amount of social security, Medicare, and income taxes to withhold for the
pay period on both wages and reported tips. You are responsible for paying
the employer's portion of the social security and Medicare taxes. You must
collect the employee's portion of the social security and Medicare taxes and
the income taxes. You can collect these taxes from the employee's wages or
from other funds the employee gives you up to the close of the calendar year.
If you don't have enough money from the employee's wages and other funds,
apply them in the following order. First, withhold all taxes due on regular
wages. Second, withhold social security and Medicare taxes due on reported
tips. Finally withhold any federal, state or local income taxes on reported
tips. You can withhold any remaining unpaid taxes from the employee's next
paycheck. If you cannot collect all of the employee's social security and
Medicare taxes on tips, show the uncollected amount in the appropriate box
on the employee's Form W-2, Wage and Tax Statement. Also, show the
uncollected amount as an adjustment on your employment tax return (e.g., Form 941 (PDF), Employer's Quarterly Federal Tax Return).
When preparing your employee's Form W–2, include wages, tips and
other compensation in the box labeled "Wages, tips, other compensation". Include
Medicare wages and tips, and social security tips in their appropriate boxes.
When figuring your liability for federal unemployment tax, add the reported
tips to your employee's wages.
If you operate a large food or beverage establishment where tipping is
customary and you normally employ more than ten people on a typical business
day, you must file Form 8027 (PDF), Employer's
Annual Information Return of Tip Income and Allocated Tips, for each
calendar year. If you have more than one food or beverage operation, you must
file a separate Form 8027 for each. Form 8027 is due on the last day of February
of the next year (or March 31st if you are filing electronically).
If the total tips reported by all employees are less than 8 percent of
your gross receipts (unless a lower rate has been approved by the IRS), you
must allocate the difference among the employees who received tips. The allocation
may be based on each employee's share of gross receipts or share of total
hours worked, or on a written agreement between you and your employees. Show
the amount allocated in the box labeled, "Allocated Tips", of the employee's
Form W–2. Do not withhold income, social security or Medicare taxes
on allocated tips.
If you are required to allocate tips, your employees must continue to report
all tips to you, and you must use the amounts they report to figure payroll
taxes.
Employers may participate in the Tip Rate Determination and Education Program.
The program primarily consists of voluntary agreements developed to improve
tip income reporting by helping taxpayers to understand and meet their tip
reporting responsibilities. These voluntary compliance agreements offer many
benefits for the employer and the employee. Two of the agreements are the
Tip Rate Determination Agreement (TRDA) and the Tip Reporting Alternative
Commitment (TRAC). A tip agreement, the Gaming Industry Tip Compliance Agreement
(GITCA), is available for the Gaming (casino) industry. Additionally, the
IRS is offering an expanded tip reporting and education program for food and
beverage industry employers called the Attributed Tip Income Program (ATIP).
ATIP has simple enrollment requirements and procedures. To find out more about
the program or to identify the IRS contact for your state, call the IRS at
1–800–829–4933. To get more information about ATIP, GITCA,
TRDA, or TRAC agreements, access the IRS website at www.irs.gov and search
for Market Segment Understanding (MSU) agreements: search for keyword "MSU
tips". You can also get Publication
1461, ATIP - Attributed Tip Income Program.
For more information on employer responsibilities, refer to Publication 15, (Circular)
E, Employer's Tax Guide. For more information on employee responsibilities,
refer to Publication 531, Reporting Tip Income, or Publication 1872 (PDF), Tips on Tips.
Page Last Reviewed or Updated: December 22, 2008
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