If you are a restaurateur, you understand the importance of accounting for tips for your servers. For employers and servers, it’s a way to have the servers get paid. Accounting for tips is important for IRS and state tax authorities since it is a source of tax revenue. Under the IRS rules, an employee is considered a tipped employee if they receive $30 or more per month in tips. All tipped employees are required to report 100% of their tips to the employer. An employer is required to maintain records of all employee tips and include those in payroll, withhold all payroll taxes, pay an employer portion of the payroll taxes, and report it on the employee W-2 at year-end.

An employer is required to pay minimum wages to employees, but not all of the wages can come from tips. An employer is required to pay minimum cash wages (this varies from state to state) to tipped employees, and then, they can use the tips earned towards minimum wage for the state. The next challenge is having a system in place where all tips are reported and accumulated in a single place to ensure all tipped income is accounted for. The IRS requires restaurants to report tips on Form 8027 when tipping is customary and they have 10 or more employees. IRS rules also assume that a minimum of 8% tips on all restaurant sales which is what many restaurants report, even though actual tips (mostly cash) average up to 15% to 20%.

• Note that tips can be received through charges on credit cards, debit cards, or cash. Credit and debit card charges are easier to account for since those charges flow through the employer’s sales and accounting systems. For employers where cash tips are customary, it may be required for employees to report all cash tips at the end of the day. This money is deposited into a separate bank account where all tips are run through a payroll system and employees are paid their tips the next day after payroll taxes have been deducted.

The IRS has designed a voluntary form 4070A which an employer can ask its tipped employees to use to report its tips income. The form has employee information such as name, address, social security number, period of the reported tip income (maximum one month), and the tips income.

Running a restaurant business can be very complicated and a restaurateur needs an experienced accounting professional. Often, you are running your restaurant on a thin margin and can use all of the efficiency available to help run a profitable business. We highly suggest working with an experienced restaurant professional. If you have further questions, feel free to contact Kislay Shah CPA at kislay@shahcpaus.com or call 646-328-1326. Please read the corresponding article on Accounting for Restaurants located on this website.