Tipping is sometimes a controversial practice, although it’s commonplace in American society today. Whenever you go to a restaurant, you’ll be asked to tip your server. Some places will even include a tip on your bill. Hotel workers, such as concierges and cleaning staff, are often tipped employees too. If you go to a spa, you may find the manicurist, the hairdresser, and the massage therapist also accept tips.
What implications does tipping have for your employees and your business? If you work in an industry where tipping is commonplace, such as the restaurant business, you may find your tipped employees asking this question, especially when it comes to withholding and reporting taxes to the IRS.
Educating your employees isn’t just the smart thing to do—it’s the right thing to do.
What Is a Tip?
Your employees probably think they know the definition of a tip. When a customer leaves them cash or adds to their debit or credit purchase, the “additional” amount the customer pays is the tip.
Tips can also come from other employees if you pool tips or split them up at the end of the day. Tip sharing arrangements are sometimes more equal and fair, and many employers will use this as a way of keeping track of tips and distributing them more evenly.
Finally, the IRS also suggests employees should count the value of non-cash items, such as tickets, gift cards, or other items of value. If a customer comes in during the holidays and hands each employee a $5 iTunes gift card, that’s considered a tip.
Keeping Good Records
Once your employees understand what counts as a tip, you should encourage them to keep a daily record of them. This includes recording the value of all cash, electronic, and non-cash tips they receive. They should also include any amounts they receive from tip pooling or splitting arrangements you have devised in the workplace.
The IRS requires tipped employees to keep this daily record and even issues Form 4070A, Employee’s Daily Record of Tips for the sole purpose of keeping track of tips.
Reporting to the Employer
Employees should also report their tips to their employers on a daily basis. There are a couple of exceptions. If an employee earns less than $20 in tips, they do not need to report this amount to you.
The other exception is non-cash items of value. If an employee receives tickets, passes, gift cards, or another item of value, they don’t need to report it to you. They do need to record it on their daily tips sheet and they need to report it on their income tax.
Employees must sign off on these records. You’ll need to include the employee’s name, the date, and the period the report covers. Employees should report their tips by the 10th of the following month. Tips received in April 2018 should be reported by May 10, 2018.
Employers can allocate tips when the total reported by all employees is less than 8 percent of gross receipts. In this scenario, the employer must split the difference among the employees who receive tips.
Tips received in this way are reported differently than tips received directly from customers or through a tip pool. They are shown in Box 8 of the W-2 form, separate from other income. Employees who received less in tips than the allocated amount do not need to report the allocated tips on their income tax returns.
Do You Have Questions?
If you or your employees still have questions about tips and how to report them properly, talk to your payroll provider. They know their way around the rules and regulations, so they can help you answer any lingering questions.