Both restaurant owners and servers have to navigate and comply with IRS tip reporting rules. While it used to be fairly easy to pocket tips—especially cash—without reporting them, the IRS has expanded its efforts to capture tip revenue by tightening down on tip reporting enforcement. Service industry employees are required to report and pay taxes on their tips. However, despite new tip reporting enforcement measures by the IRS, many service workers still receive a large portion of their tips in cash and choose not to report these earnings.
Restaurant owners and their employees have different tip reporting responsibilities. As a restaurant owner, you are responsible for withholding federal and state income tax from your employee’s wages as well as the Federal Insurance Contributions Act (FICA) tax. As a restaurant owner, it is important to be aware of your responsibilities in enforcing the tip reporting of your employees.
If your restaurant is struggling to navigate the complexities of tip reporting, it is best to consult with a skilled tax lawyer. Outlined below are some of the tip reporting responsibilities of restaurant owners.
You Need to Receive a Tip Report from Your Employees
The IRS requires service industry employees to report their tips on a monthly basis. However, in order to accurately withhold the proper taxes and calculate the total wages of their employees, restaurant owners are required to receive a tip report from their employees for each payroll period.
To collect this information, you can have your tipped employees enter their total cash tips at the end of every shift in your point of sale (POS) system. If you don’t want to use your computer system to track trips, you can use IRS FORM 4070A.
You Need to Withhold Income and FICA Tax From Every Paycheck
Another important tax responsibility of service industry employers is withholding income and FICA tax from their employees’ paychecks. If you use a payroll service, you’ll need to report the total amount in tips for a given period along with your employees’ hours and hourly rate. When tax season comes around, you will need to calculate each employee’s total wages.
Restaurant owners are legally required to distribute IRS Form 4070 to their tipped workers or to have their employees report their tips through an acceptable alternative, such as a POS system. However, as a restaurant owner, it can be challenging to force your employees to report all of their tipped income. If for some reason the IRS decided to perform an audit on your restaurant, it could be a problem if all of the tips of your employees were not accurately reported.
If the IRS performs an audit on your restaurant, you will only be responsible for your share of the FICA taxes on unreported tips. While the odds are low that the IRS would be able to successfully substantiate unreported tip income and perform an audit, it’s still a risky move to create a lax tip reporting atmosphere in your restaurant. If an audit was performed and the IRS was able to account for unreported tip income, you could owe thousands of dollars in FICA taxes. Therefore, it’s always best to educate your employees on the importance of tip reporting and encourage them to accurately report their tip earnings.
You Must File IRS Form 8027 at the End of Each Year
IRS Form 8027 summarizes your restaurant’s total sales, credit card tips, and reported tips. If tipping is customary in your restaurant and you have more than 10 employees, you must submit an annual “Employers Annual Information Return of Tip Income and Allocated Tips.”
Consult a Skilled Tax Resolution Lawyer
If your restaurant is facing troubles with the IRS as a result of failing to report your tips properly, it is important to consult with a skilled tax resolution lawyer. At Morgan Sebastian Law, we’re eager to confront all the complexities of your tax issues. When you work with Attorney Becky Sebastian, you will experience compassionate attention that provides a sense of relief and peace of mind regarding your financial state.
To schedule a consultation with an experienced tax resolution lawyer, call (877) 223-6605 or fill out our online contact form.