Restaurant payroll and tip reporting are complex. There are numerous requirements that employers face, such as reporting tip income and collecting tax on tips. Restaurateurs also must ensure that the total tip income reported to them by tipped employees during any pay period is, at a minimum, equal to 8% of their total receipts for that period.
When the total reported to a restaurant is less than 8%, the establishment must allocate the difference between the actual tip income reported and 8% of gross receipts. There are three methods for allocating tip income:
- Gross Receipt Method,
- Hours Worked Method, and
- Good Faith Agreement.
Do employers have any liability for taxes if tipped employees receive tips but don’t report them to the employer? Yes. Restaurants are liable for the employer share of Social Security and Medicare taxes on tips employees don’t report to them.
Other questions that your restaurant may have to answer: How do you handle the reporting of service charges (or automatic gratuities) versus tips? Can you exclude the value of on-the-job meals provided to your workers from their wages by making them non-taxable fringe benefits?
Employers that operate a large food or beverage establishment must file a different IRS tip reporting form than small restaurants. What’s considered large? An establishment is considered large if food and drinks are consumed on the premises, tipping is customary and the restaurant employs more than 10 employees who work a certain number of hours a day.
Fortunately, restaurants may be entitled to a federal tax credit for the Social Security and Medicare taxes they pay on employees’ tip income. This is the Internal Revenue Code Section 45B credit, more commonly known as the FICA tip credit. Unfortunately, claiming the credit is complicated and many restaurants don’t get the full tax break they deserve.
Compliance Is Tough
These are only some of the payroll challenges your restaurant deals with. It’s difficult to stay in compliance with all the rules. To make matters worse, there are penalties for not meeting the filing and payment requirements. And your restaurant might wind up having to undergo an IRS tip audit. If you have more questions please don’t hesitate to call.
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