Reportable Tips Affect Both Employees and Employers

Several service-related businesses have employees that receive tips from customers. Tips have tax implications for both employees and businesses. The business is responsible to check the reported tips for reasonableness and collect and pay federal and FICA taxes.

There is a tax credit available regarding the employer portion of FICA taxes paid on tips to reduce the burden of these taxes on businesses. Businesses should comply with record keeping requirement of this credit and take advantage of the tax savings.

Certain set service fees are not considered tips by the IRS. These service fees are classified as wages once paid to employees and may have some payroll tax implications.

Large food and beverage establishments defined by the IRS regulations are subject to additional tip reporting on Form 8027. To be classified as a large food and beverage establishment a business must have at least 80 labor hours in a typical business day.

Rules regarding taxation and reporting of tips are complicated and subject to many exceptions. They affect employee and businesses and should be taken seriously. If you have any questions regarding the above information please don’t hesitate to contact Sam Zarrabinia via Email or by calling 301-652-6700.