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.
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