Employee tip reports for service sector employers
Employees in the service sector are paid a federal minimum wage of $ 2.13 per hour. With this hourly wage, it’s no wonder that most servers rely primarily on customer advice to support themselves.
Note that all tips (cash and otherwise) accepted by an employee are income bound by federal taxes. Employers generally have a single tax and compensation system that covers the income that employees receive from tips.
If you own a business where employees receive tips, you need to know how to track and report them.
What are employee tips?
Employee tips, also known as tips, are discretionary payments that customers give to a particular employee for excellent service. The customer determines the amount to tip a service employee.
However, the standard rule for tips is to give at least 20% of the total bill. Most of the time, clients make optional payments directly to department employees. Some business owners often use a tip pooling system, where all employees share the total amount of tips.
And the guidelines for how these tips are distributed depend on the employer. Often tip pools include employees who rarely receive tips like bussers, cooks, dishwashers, and janitors.
Don’t confuse tips with service charges, however. Service charges are tip amounts added to the price of a meal. A discretionary payment is considered a tip if:
- The customer decides who receives the payment
- Payment is not dictated or negotiated by the business owner
- The customer decides the amount
- Payment is not forced or mandated
Many customers are looking for travel packages on a budget for couples or individuals to enjoy the holidays. So, employees should always be on their best behavior and provide excellent service to increase their chances of earning big tips this holiday season.
When should employees report tips?
If the waiter earns at least $ 20 in tips in a month, he must record it and report it to the employer. Cash tips include discretionary debit or credit card payments made to a service employee, and customer tips are sometimes shared with other employees.
On the other hand, non-cash tips include tickets, passes, and other products or merchandise. Employees who usually and regularly earn tips of about $ 20 per month are called tip employees. This term is used to distinguish employees who receive a tip from those who do not.
All employees keep all their tips collected. If the company accepts tips on debit or credit card transactions, employers must pay the employee. But they can reduce card transaction fees.
In addition, the Department of Labor says this reduction in tips should not lower the employee’s wages unless the federal minimum wage. If this happens, the employer must pay the employee the next payday.
Responsibilities of employees
Employees with tips must do the following:
- Keep track of their daily tip income. They can use an employee’s daily tip record or Form 4070A
- When the monthly tip income is at least $ 20, he must report it to the employer
- They must report any tip income not reported on a personal income tax return
Responsibilities of the employer
Employers have many obligations and responsibilities when it comes to employee tip income. These include responsibilities for reporting and keeping records, paying or filing taxes, filing forms, and collecting taxes on tips.
The employer must keep employee tip reports and is required to withhold taxes based on income and wages from the tips. In addition to this, employers must pay the employer’s share of Medicare taxes and Social Security taxes.
This information should be included on the employee’s W-2 form. In addition, the employer is required to complete the FUTA form, the 940 form and the income tax return. Note that only the employer pays the FUTA tax as it is not withheld from the employees’ wages.
What if the employee does not report the tip income?
It is the employee’s responsibility to report tip income to their employer for income tax purposes. Suppose the employee does not report tip income. In this case, the employer is not obligated to pay the employer’s share of Medicare taxes and Social Security tax on unreported tip income until the IRS makes a request and notification. notice for taxes.
Additionally, employers are not required to withhold and pay an employee’s share of these taxes if they do not report their tip income.
The US government considers anyone to be a tip employee if they earn at least $ 30 per month in tips. Common occupations that receive tips include casino dealers, golf caddies, taxi drivers, hairdressers, bellboys, bartenders, and waiters. Although tipping is customary in the United States, some countries tip less frequently because employees are generally better paid.