If you operate a restaurant or similar business where it is customary for employees to collect tips, it is important to note whether you have to pay taxes on those tips. Employers that do not accurately report income from tips may open themselves to several tax penalties. If you require assistance managing employee tips for your business, you should contact an experienced Roseville tax return planning lawyer. The NewPoint Law Group is dedicated to helping your company manage its tax liability so that you can focus on running your business efficiently. NewPoint Law Group is here to explain whether employers in California have to report employee tip income on their taxes.
Employee Tip Reporting Requirements
Employee tips are subject to taxation under certain circumstances. Employers should be aware that cash tips and non-cash tips made to employees are subject to federal income taxes. That is why it is important for an employer to develop a system where employees can report tips that are subject to taxation.
Employee Tip Reporting
Employees who collect tips should know when they need to report these tips to their employer. The Internal Revenue Service has a broad definition of what should be considered a tip:
- Cash tips from patrons
- Tips earned through electronic forms of payment like credit cards, debit cards, and even gift cards
- Tips earned from tip pools with other employees or tips distributed by the employer
- The fair market value of non-cash tips
Employees that collect tips should be sure to keep a daily record of their tips. This will make it easier to gather income earned from tips to satisfy the employer’s tax liability. Non-cash tips do not have to be reported to an employer, but the employee may have to report those tips as income on their tax return.
Your employees should be notified that they have to submit information about their tips in a written statement. However, an employee does not have to report to you any tips that do not equal at least $20. When filling out their written statement regarding their monthly tips, employees should include:
- The employee’s name, address, and social security number
- The name of the employer, name of the employer’s business, and its location
- The month or timeframe when the tips were collected
- The number of tips received in a month or relevant timeframe
The IRS also requires that tips are reported on a certain schedule. Specifically, an employee should report their tips by the 10th of the month after the months when the tips were collected. For example, all tips earned by an employee in October must be reported by the 10th of November. While an employer can increase the frequency of reporting, the reporting statement should only include information for tips collected in the span of a month.
Employer Tip Reporting
An employer must keep track of several factors when reporting employee income. For example, an employer is required to withhold employee income taxes from tips that are reported. Additionally, an employer must also factor in employee tips when paying for their company’s share of Social Security and Medicare taxes.
It is important to note that if an employee does not report their tips to an employer, the employer is not accountable for failing to pay the accurate amount of taxes for Medicare and Social Security. However, if the IRS issues a notice to the employer requesting that the taxes be paid, this could change.
An employer should also know the difference between optional tips and mandatory tips. Optional tips and other gratuities are not subject to taxes if an employee receives them. For example, if you run a restaurant and you provide a blank section on the check for a customer to make a tip, any tip that is given should be considered optional. This also applies when the check has a recommended tip amount that is not required.
A mandatory tip is one that is automatically added to the bill before the customer is presented with the bill. For example, if you have an 18% gratuity for parties of 6 or more, this is a mandatory tip.
Our California Tax Attorneys are Ready to Work with You
If you need legal assistance handling the reporting of employee tips for your business, you should consult an experienced California tax attorney today. At NewPoint Law Group our team of devoted tax attorneys will work tirelessly to ensure that your business complies with tip reporting laws and other complex tax regulations. Our team of attorneys possesses decades of combined legal experience, and we are prepared to use that experience to represent your company. To schedule a confidential legal consultation, contact the NewPoint Law Group at 1-800 358-0305, or contact us online.