Tips account for a considerable portion of employee wages in service-based businesses, such as restaurants. Butwhen employees earn tips, what happens to the tip income?做员工告诉你他们赚多少钱小费?Or, do employees take their tips home only for you never to hear about the tips again?

What are reported tips?

Employees can earn tips directly from customers, from customer credit card charges, or fromtip pooling. If an employee earns tips totaling $20 or more in a month, you and the employee must both report the tips.

It is important for employees to report all their tips to you.Payroll taxesare due on tips. If employees do not report their tips, they still owe the taxes plus penalties.

Also, if employees do not have enough reported tips, you might have to allocate tips to your employees. This means you will have to give extra tips to your employees. You will handle allocated tips differently than regular reported tips. To learn more about allocated tips, read our article,“What Are Allocated Tips?”

How to Report Tips on Payroll

Reporting tips on payroll requires different steps for both the employer and the employee.

Employee reporting requirements

Employees must report their tips to you and on their income tax return.

If employees have questions about reporting tip income, they should referenceIRS Publication 531.

Report tips to employer

Employees should keep accurate records of all tips they receive each day. To track their daily tips, employees can useIRS Form 4070A(found inPublication 1244).

If an employee earns tips totaling $20 or more in a month, they must report the tips to you by the tenth day of the next month. Employees can report their tips to you withForm 4070(also found inPublication 1244).

For example, Sarah earns $500 in tips during the month of May. She should record the tips she earns each day on Form 4070A. Sarah must report the tips to her employer by June 10. She can use Form 4070 to report her month’s tips to her employer.

你可以要求员工报告他们的建议you more frequently, such as every week.

Report tips on income tax return

Employees must report their tips on their annual income tax return. If an employee did not report their tips to you, they should useForm 4137to calculate their owed Social Security and Medicare taxes.

Employer reporting requirements

Once employees report their tips to you, you must withhold taxes and report the tips to the IRS.

Withhold taxes

All reported tips are taxable. You must collect payrolltaxes on tips, includingincome tax withholding, Social Security tax, and Medicare tax.

You must report each employees’ reported tips in box 1 of theirForm W-2. Your employees will then use that information to fill out their tax return.

File Form 8027

If you run a large food or beverage establishment, you are required to fileForm 8027.

You run a large food or beverage establishment if:

1. Your business is located in the 50 states or the District of Columbia.
2. It is customary for customers to tip employees.
3. You employed more than 10 employees on a typical business day during the previous year.

On Form 8027, you will report the total tips employees reported for the year. You will also report any tips that you allocated to employees.

With Patriot’ssimple payroll software, you can add tips to each employee’s paycheck. Try the software for free!

This article was originally published on 10/10/2014.