PEOPLE WHO GET TIPS AS PART OF THEIR PAY
Adequate tip records are a must for employees who receive
tips, especially waiters and waitresses who work in “large food
and beverage establishments” (i.e., food service operations with 10 or
more tipped employees). These
establishments often assign tips to
employees, based on a percentage of the employees’ sales and the amount
of tips each employee has reported to the establishment. These
are called “allocated tips” and employers must report
them to the
IRS. If the IRS questions the employee’s tips, it’s up to the tipped
employee to show, through good records, that the allocated tip
amount is in error.
KEEPING A GOOD TIP RECORD: KEEPING TIP RECORDS:
If you are a waiter or waitress, the IRS requires you to
keep a record of your tips. The record needs to include
tips you receive from:
• your customers in cash;
• other tipped employees because of a
“tip-sharing” arrangement; and
• your customers who pay by credit card.
When you receive a tip but pay part of it to someone else (for example, a bartender), you should note the name of that person in your tip record along with the amount you paid him/her. You should keep your record updated on a
day-to-day basis to make sure of its accuracy.
REPORTING TIPS TO YOUR EMPLOYER:
In order to comply with IRS rules, you need to let your employer know the total amount of tips you receive. This reporting should be done in writing within the 10-day period following the end of the month in which you receive
the tips (sometimes the due date is extended a day or so if the last day of the 10-day period is on a weekend or legal holiday).
Once you make the report to your employer, he/she adds the amount to your regular wages and uses the total to figure how much income tax, Social Security tax and Medicare tax to withhold from your regular paycheck.
TIPS NOT REPORTED TO YOUR EMPLOYER:
Special rules apply to tips you received but didn’t, for one reason or another, report to your employer. If such tips total $20 or more in any given month while working for one employer, you will need to figure your own Social Security and Medicare taxes for them. These taxes are computed and paid with your tax return. Keep in mind that the IRS can also charge a penalty for tips that aren’t reported to an employer.
According to the rules, your tip records need to clearly establish the tips you received. That’s why a timely, day-to-day record is so important.
Your tip record should include the following:
EMPLOYEE’S NAME, ADDRESS, EMPLOYER’S NAME, ESTABLISHMENT NAME (IF DIFFERENT), MONTH AND YEAR:
Your record can be kept on a sheet of paper (excel would be great) that includes the following:
The tips you received directly from customers and other employees
Credit card tips
Tips you paid to other employees
Names of the employees that you paid
Then get a total for the month.
Use a separate page for each month.
The information provided in this brochure is an abbreviated summary
of the rules for the job-related expenses applicable to people that get
additional details as to specific business expenses, the records
required and the various governmental regulations, consult the
firm providing this brochure.