Waiters and waitresses are one of a restaurant owner’s most important assets. Not only do they set the tone of the dining experience; they also serve as a restaurant’s sales staff - they make recommendations and inform customers of current specials. So it’s not hard to believe that service staff can make or break a restaurant. A restaurant with great food has no chance if its service is bad, while a mediocre restaurant with outstanding service can thrive.

It is a common practice for customers to tip their servers at restaurants. For servers, cash tips are expected to compensate their low hourly wages. In most cases, a server’s tips make up an easy majority of their total wages, and not surprisingly, most of these tips go unreported and untaxed. After all, cash tips are considered the main perk of being a waiter or waitress, so its easy to understand why employers and staff alike don’t want to disclose their income from tips.

But don’t assume the government is unaware of this and that they aren’t after restuarants who do this. Being that so much money is made through tips, the government has taken a firm stand on taxing them. There is a strict set of rules that outline how restaurant owners are supposed to collect, distribute, and report their employees’ tips.

With these rules come a number of employee and employer responsibilities:

Employer Responsibilities

Collect tip reports from every employee at the end of each payroll period. You can do so more often if you feel it is necessary.

Withhold income taxes and FICA taxes and report your employees’ tips to the IRS. Tips must be reported no later than the 10th day of the month following the pay period.

File form 8027 if your restaurant is considered a “large business”. This must be done every year, and consists of reporting to the IRS your restaurant’s charged sales, charged tips, total sales and total tips.

Employee Responsibilities

Keep a daily record of tips in a tip log that your employer provides you. This way your employer can apply the necessary FICA withholdings properly.

Report all yearly tips with IRS publication 1244.

TRAC Program

As an incentive to make employers comply with tip-reporting laws, the IRS has implemented the Tip Reporting Alternative Commitment (TRAC) program. By signing up and agreeing to the TRAC program, employers agree to:

-Implement tip-reporting procedures

-Educate their employees about tip-reporting

-Stay on top of all tip-reporting paperwork, reporting, and related obligations

In return, the IRS agrees not to access any FICA taxes from your restaurant, unless it has individually looked into all employees under-reporting their tips in your business. The IRS will not instigate any audits of your business while you are enrolled in TRAC , though it may individually examine your employees for under-reporting.

More info on the TRAC system can be found at www.irs.gov/pub/irs-utl/foodtrac.pdf.

How You Can Educate Your Employees

Warn your staff about the risk of underreporting their tips. Let them know they could face fines or even time behind bars for lying about the amount of tips they make.

Use technology. One way of making your employees comply is to program POS systems to require daily tip disclosure before your employees can clock out.

Repetition: Repetition is a powerful way of getting your message across. It will let your employees know you are serious about this issue. Reiterate in staff meetings the importance of proper tip reporting.

Pink Payroll is a nationwide payroll company. We aim to provide affordable, easy payroll to our clients throughout the 50 states. If you would like to learn more, visit our services page or request a free payroll quote.

California Employers are well aware of the minimum wage increase that went into effect July 2014.

The increase, according to the California Department of Industrial Relations, raised the hourly minimum from $8 to $9, and will require a $10 minimum wage by 2016. For some employers, the increase was little but ceremonial as local laws already required a minimum wage that exceeded the statewide increase. For example, San Francisco’s minimum wage is $10.74/hr, while San Diego is pushing for its own increase above state law.

What you may not know is that the California salaried minimum wage is different than the hourly minimum wage.  The statewide increase also raises the wages of exempt or “salaried” employees.

By California law, exempt workers must meet a salary requirement. The general requirement is that the salaried employee’s monthly pay must be twice what a full-time hourly employee earns (40 hours/week). So for full-time exempt workers, the minimum wage was $33,280 per year. With California’s increase in effect, the minimum wage for exempt workers is now $37,440 per year. This means that if your employee’s salary wage is still in compliance with the 2013 minimum, it’s time to make that change.

If you have a salaried employee who is now making less than the legal requirement following the increase, we recommend you make adjustments now. It’s also a great time to review your employees’ salaries to prepare for the increases to come. By 2016, exempt employees are required a yearly minimum of $41,600.

By making adjustments now, you will avoid penalties and back-pay interest. You will also steer clear of potential overtime premium pay for any employee’s loss of exempt status and possible litigation costs. If you have avoided these penalties until now, consider yourself lucky. It’s never too soon to work out these kinks.

Pink Payroll can help you with a variety of payroll related tasks. Visit our payroll services page to learn more, or contact us for a free quote!

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If you are a San Diego small business owner, you will want to keep track of San Diego’s new minimum wage and paid time off laws.

MINIMUM WAGE INCREASE:  San Diego is the first city to pass a minimum wage increase since California’s statewide increase to $9 per hour in July 2014.   The increase would gradually raise the minimum wage to meet inflation, starting at $9.75 as of Jan. 1, 2015, to $10.50 by Jan. 2016, and then further to $11.50 by Jan. 2017. By 2019 the minimum wage will be indexed to match inflation.

PAID SICK DAY ADDITION:  This law will also require employers to allow five paid sick-days each year for each employee.

Should this become law, Pink Payroll can assist small business owners to stay compliant with the increases.  We have an Human Resource group that will help you add the sick day rules into your HR Employment Manual.  The Pink Payroll Software will track the days accrued (earned) and used by each employee.  We can also help you with calculations to see how much this will cost you on an annual and per hour basis.  Contact us for to get information on how to manage this change with your business.

Mayor Kevin Faulconer’s veto of the increase was overridden by the San Diego city council on Monday, August 18th by a six-to-two vote.  Those who voted to override the veto argue that the increase will help low-income families that struggle to make ends meet, and could even pull some out of poverty. They state an estimated 172,000 San Diego residents will benefit from the increase.

Those against the increase, such as Faulconer, argue that it will actually hurt small businesses and put the city at an economic disadvantage with neighboring areas. He argues that small businesses will have to lay off employees to accommodate the increase.

Though the veto was overridden successfully, the wage increase faces one more obstacle before it can become official. The San Diego Small Business Coalition has introduced a petition to put the wage increase on a voter’s ballot before it can take effect. The petition has 30 days (as of Wed. Aug. 20) to get 33,866 signatures for the referendum to be on the ballot. If it succeeds, San Diego voters will have to approve the wage hike. We will continue to provide info on this event as it unfolds.

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