Small Business/Self-Employed/Other Business
This is archived information that pertains only to the 2003 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.
12.3 Small Business/Self-Employed/Other Business: Form W–2, FICA, Medicare, Tips, Employee Benefits
If my part-time employees receive less than $20 a month in tips,
are they required to report them to me?
Employees who receive less than $20 per month in tips are not required
to report the tips to the employer, but they must include them in gross income
on their tax return. For additional information on tip withholding and reporting
requirements, refer to Tax Topic 761 , Tips - withholding and reporting and/or Publication 15, Circular E, Employer's Tax Guide.
References:
- Publication 15, Circular E, Employer's Tax Guide
- Publication 1872 (PDF), Tips on Tips - A Guide
to Tip Income Reporting for Employees in the Food and Beverage Industry
- Tax Topic 761, Tips - withholding and reporting
As an employer, do I have any liability if my employees receive
tips but don't report them to me?
Employees who customarily receive tips are required to report their cash
tips to their employers at least monthly, if they receive $20 or more in the
month. Cash tips are tips received directly in cash or by check, and charged
tips. You have a liability to withhold and pay Social Security and Medicare
tax on your employees' reported tips, to the extent that wages or other employee
funds are available. If the employee does not report tips to you, it places
you at risk of possible assessment of the employer's share of the Social Security
and Medicare taxes on the unreported tips. If you are a large food or beverage
establishment (more than 10 employees on a typical day and food or beverages
consumed on the premises), you are required to allocate tips if the total
tips reported to you are less than 8% of gross sales. Report the allocated
amount on the employee's w-2 at the end of the year.
References:
If the reported tips from employees are more than 8% of sales, must
an employer still allocate tips to the employees?
No. Tip allocation is required when the amount of tips reported by employees
of a large food or beverage establishment is less than 8% (or an approved
lower rate) of the gross receipts, other than nonallocable receipts, for the
given period. If the employees are reporting more than the 8%, there would
be no allocated tip amount. However, the employer must still file Form 8027 (PDF), Employer's Annual Information Return
of Tip Income and Allocated Tips.
References:
Can the 8% - normally used for allocated tips - be a matter agreed
upon as reported tips between the employer and employees, so that the employees
do not have to report the exact amount of their tips?
No. The law requires that the employee who receives tips must report the
actual tip amount to his or her employer if the amount is $20 or more for
that calendar month. The 8% figure is not a simplified reporting method.
The employee should keep a record of his or her daily tips. A daily tip
record can relieve the employee from having to include allocated tips in income
by documenting that the amount of tips the employee reported was the actual
amount received.
References:
-
Instructions for Form 8027, Employer's
Annual Information Return of Tip Income and Allocated Tips
- Publication 3148 (PDF), Tips on Tips, A Guide
to Tip Income Reporting (Employees)
- Publication 3144 (PDF), Tips on Tips, A Guide
to Tip Income Reporting (Employers)
- Publication 1244 (PDF), Employee's Daily Record
of Tips and Report to Employer
- Publication 1872 (PDF), Tips on Tips - A Guide
to Tip Income Reporting for Employees in the Food and Beverage Industry
Can an employer add the reported tips to just one payroll a month,
even a special payment separate from the regular wage payment, and pay only
the wage amount on the other payroll dates?
An employer can report an employee's tip income and withhold taxes once
a month or more often than once a month. The two items of practical consideration,
besides the sophistication of your payroll system, are the employees' tip
reports and the charged tips.
The employees are required by law to report their cash tips only once a
month, by the 10th day of the month following the month for which they are
reporting. The employer may require the employees to report their tips more
often. This would facilitate withholding on tips and the reporting of the
tips as income on the employees' pay stubs.
When an employer makes the charged tips available to the employee may depend
on the employer's policy. The employee monthly tip report should include information
about charged tips that the employer has paid to the employee during the reporting
period, as well as tips paid directly to the employee.
It would be most practical for withholding purposes for the employer to
report the tip income for each employee when all the tip information is available
and the payments for charged items are available. If, when the employee is
paid, there is not enough money available to withhold all taxes owed on wages
and tips, the employer can withhold the remaining amount from the next paycheck
or the employee can give money to the employer to cover the withholding.
For more information, refer to Publication 15, Circular E, Employer's
Tax Guide and Publication 1872 (PDF), Tips on Tips - A
Guide to Tip Income Reporting for Employees in the Food and Beverage Industry.
References:
- Publication 15, Circular E, Employer's Tax Guide
- Publication 1872 (PDF), Tips on Tips - A Guide
to Tip Income Reporting for Employees in the Food and Beverage Industry
Does a household employer have to pay social security and Medicare
for all household employees if only one employee makes more than $1,400 in
the year?
No. The employer only has to pay social security and Medicare tax for the
employee(s) who receive $1,400 or more in wages for the year. If the amount
paid to any employee in a calendar year is less than $1,400, no social security
or Medicare tax is owed for that employee. If social security and Medicare
tax must be paid, the employee's portion of the social security and Medicare
tax should be withheld also, unless the employer chooses to pay both the employer's
share and the employee's share.
References:
- Publication 926, Household Employer's Tax Guide; Do
You Need to Pay Employment Taxes?
- Tax Topic 756, Employment Taxes for Household Employees
I started a new business. I need information on how to file Forms
W-2?
First of all, Form W-2 (PDF) should
be furnished to your employees by January 31. It is also your responsibility
as an employer to file Forms W-2 with the Social Security Administration
(SSA) for your employees, showing wages paid and taxes withheld for the year.
You must send Copy A to the SSA with Form W-3 (PDF) by February 28. If you file electronically (not by magnetic
media) the due date is March 31. Form W-3 shows the total of all W-2s being
sent. The address is listed in the
Instructions for Form W-2 and W-3. Refer to Tax Topic 752, Form W-2 - Where, When and
How to File, or Publication 15, Circular E, Employer's Tax Guide.
References:
I sold my business and the new owners kept the employees. What is
my requirement as the former owner for filing Forms W-2 for the employees?
If the new owner acquired substantially all of your business property and
retained your employees, you may need to file a final Form 941 (PDF), Employers Quarterly Federal Tax Return . The final Form
941 generally must be filed on or before the last day of the first calendar
month following the quarter for which the return is made. You will need to
furnish Forms W-2 to your employees by the time you are required to file the
final Form 941. You will also need to file Forms W-2 and W-3 on or before
the last day of the second calendar month following the period for which the
final Form 941 is filed.
If you and the new owner agree, you can be relieved of furnishing Forms
W-2 to the employees and filing Forms W-2 and W-3 with the Social Security
Administration. Such an agreement would be allowed if the employees will be
paid wages by the new owner in the same calendar year and the Forms W-2 furnished
to these employees will contain the required information , i.e. wages paid
and taxes withheld, from both employers. The new employer will furnish Forms
W-2 to the employees and will also file the required Forms W-2 and W-3 with
the Social Security Administration. These actions will follow the normal end-of-year
time lines. You will remain responsible for the Form W-2 and W-3 reporting
obligations for the employees who are not employed by the new owner.
Please refer to Revenue Procedure 96-60 for a full discussion
of this situation.
References:
Is it possible to get an extension for sending out W-2 forms? I
was told the deadline is February 28th.
There are two deadlines for sending our Form W-2. You must furnish Form
W-2 to your employees by January 31. To get an extension of the time to furnish
your employees with Form W-2 you must send a letter on or before January 31st
requesting the extension. Refer to the
Instructions for Form W-2 and W-3 for the information that must be in the letter
and mailing instructions.
The deadline for sending Forms W-2 with a Form W-3 to the Social Security
Administration is the last day of February. If you terminate your business
the date may be different. To get an extension of time to mail the Forms W-2
to the Social Security Administration file Form 8809 (PDF), Request for Extension of Time to File Information Returns,
before the due date of the Forms W-2. If approved, you will have an additional
30 days to file.
References:
What publications are available that would explain the taxation
policy for Flexible Spending Arrangements (FSAs)?
Information on Flexible Spending Account and Cafeteria Plans can be found
in the following sources listed below:
References:
When an employer provides day care assistance, should the employer's
contribution be reported in box 10 of Form W-2?
Yes. An employer reports dependent care assistance payments in box 10 on
Form W-2.
References:
Is an employer required to provide the IRS with a signed receipt
from a dependent care provider in order to release funds that are withheld
from an employee's pretax salary and deposited to a dependent care flexible
spending account?
The Internal Revenue Service does not specify a method for the documentation
of reimbursable expenditures. Good accounting and business practices should
dictate the type and sufficiency of documentation provided by employees who
claim reimbursable expenses. Please review the plan document to determine
if it specifies the type(s) of documentation acceptable.
References:
Can an employer pay for health care costs of an employee as a fringe
benefit?
Yes, generally an employer may pay for health care costs of an employee
as a nontaxable fringe benefit. Refer to Publication 535, Business
Expenses , for a complete discussion of employee benefit programs.
References:
If our company pays for the employee's health care costs directly
to the medical facility, as opposed to a reimbursement, is the employee benefit
reported on Form W-2 and subject to social security withholding?
Health care costs paid directly to the medical facility is normally a nontaxable
employee benefit provided that it is paid as part of an accident and health
plan. Refer to Publication 535, Business Expenses, for more information
on employee benefit programs.
References:
If an employer pays health insurance benefits for the employee and
dependents, are both the employee's and the dependent's benefits income to
the employee?
If an employer provides health insurance for the employees, the benefit
provided is generally not taxable to the employee. An employer can generally
deduct the cost of a group health plan on the "employee benefit programs"
line of their business income tax return.
Group health plan defined: This (including a self-insured plan) is a plan
that provides medical care to your employees, former employees, and their
spouses and dependents. The plan can provide care directly or through insurance,
reimbursement, or otherwise. The employer can exclude the cost of providing
group health insurance to an employee from his or her wages.
References:
If we give an employee a monthly car allowance, must it be included
in the employee's taxable wages on their Form W-2?
Generally yes, unless paid under an accountable plan.
To be an accountable plan, your reimbursement or expense allowance arrangement
must meet the qualifying requirements, explained later. A reimbursement or
expense allowance arrangement is a system by which you substantiate and pay
the advances, reimbursements, and charges for your employees' business expenses.
If you make a single payment to your employees and it includes both wages
and an expense reimbursement, you must specify the amount of the reimbursement.
Qualifying requirements. To qualify as an accountable
plan, your reimbursement or expense allowance arrangement must require your
employees to meet all of the following rules:
They must have paid or incurred deductible expenses while performing services
as your employees,
They must adequately account to you for these expenses within a reasonable
period of time, and
They must return any excess reimbursement or allowance within a reasonable
period of time.
Please refer to Publication 535, Business Expenses, for
additional information about accountable and nonaccountable plans.
References:
If our business pays for an employee's airfare on a business trip,
but the employee does not submit an expense form relating to the travel, do
we need to issue a Form 1099-MISC?
No, you should report the amounts as wages on Form W-2. Generally, Form
1099-MISC is not issued to employees. Payments to your employee for travel
and other necessary expenses of your business under a nonaccountable plan
are wages and subject to income tax withholding and payment of social security,
Medicare, and FUTA taxes. Your payments are treated as paid under a nonaccountable
plan if:
Your employee is not required to or does not substantiate timely those
expenses to you with receipts or other documentation, or
You advance an amount to your employee for business expenses and your
employee is not required to or does not return timely any amount he or she
does not use for business expenses.
The amount of the airfare should be included on the employee's Form W-2.
References:
How should a tuition reimbursement program for employees be reported
as income to an employee? Should the employee be taxed at the 27%, 25% rate
for payments made after May 28, 2003, rate for supplemental payments on the
next pay check after successful completion of the course or is this something
that we just include on the W-2?
If the tuition reimbursements do not qualify as a tax free fringe benefit
under the rules for Educational Assistance Programs or as a Working Condition
Fringe Benefit, the tuition reimbursement is wages for Federal Income Tax,
Social Security, and Medicare Tax purposes.
For employment tax and withholding purposes, you can treat fringe benefits
as paid on a pay period, a quarter, a semiannual, annual, or other basis as
long as the benefits are treated as paid no less frequently than annually.
You do not have to choose the same period for all employees.
You can change the period as often as you like as long as you treat all
the benefits provided in a calendar year as paid no later than December 31.
You can also treat the value of a single fringe benefit as paid on one or
more dates in the same calendar year, even if the employee receives the entire
benefit at one time.
You can add the value of fringe benefits to regular wages for a payroll
period and figure income tax withholding on the total, or you can withhold
Federal income tax on the value of fringe benefits at the flat 27% (25% rate
for payments made after May 28, 2003) applicable to supplemental wages. You
must withhold the applicable income, social security, and Medicare taxes on
the date or dates you chose to treat the benefits as paid. Deposit the amounts
withheld as discussed in section 11 of Publication 15, Circular E,
Employer's Tax Guide .
References:
How do I figure the amount of advance earned income credit to include
in an employee's pay?
To figure the amount of the advance EIC payment to include with the employee's
pay, you must consider:
Wages, including reported tips, for the same period. Generally, figure
advance EIC payments using the amount of wages subject to income tax withholding.
If an employee's wages are not subject to income tax withholding, use the
amount of wages subject to withholding for social security and Medicare taxes.
Whether the employee is married or single.
Whether a married employee's spouse has a Form W-5 in effect with an employer.
To figure the advance EIC payment, you may use either the Wage Bracket
Method or the Percentage Method explained in Publication 15, Circular
E, Employer's Tax Guide . You may use other methods for figuring advance
EIC payments if the amount of the payment is about the same as it would be
using tables in Publication 15. See the tolerance allowed in the chart in
section 9 of Publication 15-A (PDF) , Supplemental
Employer's Tax Guide. See section 10 in Publication 15 for an explanation
of the advance payment of the EIC.
Add the advance earned income credit payments to the employee's net pay
for the pay period. Since this amount isn't wages, you do not withhold any
income, social security, or Medicare taxes from the payment.
References:
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