When restaurant staff receives tips, both employee and employer incur legal obligations to the IRS to correctly record the tip amounts, comply with reporting requirements, and pay income and payroll taxes. For the restaurant operator, it’s critical to get these details correct from the start to avoid unnecessary penalties. This article will cover how to record tips in accounting and what the tax responsibilities look like from the employer and employee sides.
What are Employer Tip Responsibilities?
Reporting requirements
The first duty that falls on employers is to record the amount of tips employees receive. This is achieved by collecting regular (at minimum, monthly) reports from all your tipped employees. These reports must contain daily records of tips received, whether in cash, by card, or as distributions of tip pooling. Some wonder how to report credit card tips, specifically. The answer is the same as reporting cash tips — only the daily and monthly tip totals are important.
The employee tip report does not include automatic gratuities, such as those applied to large parties, as those are compulsory payments and do not meet the legal standard to be considered a tip. Auto-gratuities are instead categorized as part of the employee’s regular wages (with all the typical payroll tax withholdings).
Accounting for tip income
The second employer tip responsibility is withholding income tax, Social Security, and Medicare tax on tip income. Taxes are to be deposited with the IRS every quarter via Form 941. If employees fail to report tip income, the employer is not liable for taxes on the unreported tips until they receive a notice and demand from the IRS.
In other words, “are employee tips payable to the IRS?” Tip taxes are payable only when the employer is appropriately notified of the tips by the employee. Accounting for tips in your restaurant payroll is can be complicated but a modern restaurant accounting solution will assist in streamlining the process.
Large employer duties
“Large food or beverage establishments” are employers who, on average, have more than 10 employees working on any given day. These businesses are required to file IRS Form 8027. This form records receipts from food and beverage sales and tips reported to the employer. Note that this reporting requirement applies per location, so quick-service restaurants and other multi-location brands will need to file an 8027 for each restaurant that meets the headcount requirement.
The IRS stipulates for qualifying large employers that tips to employees must be equal to or greater than 8% of gross receipts. If reported tips are below that amount, the employer must distribute them to tipped employees until that measure is reached.
Employee Tip Responsibilities
As mentioned above, employees must keep a record of daily tips and submit that record to their employers monthly or more frequently if requested.
Employees are responsible for reporting tips to IRS as income and paying their share of income tax, Social Security tax, and Medicare tax via Form 1040. Note that, as previously stated, auto-gratuities such as those applied to large parties are not tips and should be treated like regular income. When making their annual tax payments, employees may find they have unreported tip income for which to account.
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How Does Software Aid in Managing Tips?
We have covered the manual requirements of how to record tips in accounting. But operators should be aware that managing this all by hand is suboptimal. Restaurant accounting software is built to handle tip income and will significantly ease the administrative burden of tip income management.
RASI’s accounting solution for restaurants integrates with POS data to record tips directly at the source. This is an immediate win for data accuracy and convenience. It will also calculate the payroll taxes applicable to tip income. Moreover, RASI will generate Form 8027 for the large employers that require it.
How Does Tracking Tips Help a Restaurant?
Tracking tips fulfills reporting and record-keeping requirements from the IRS. As all experienced restaurant operators know, it is far cheaper and less stressful to do it correctly the first time than to contend with penalties and fees down the line when it comes to taxes.
Next, proper accounting for tips in restaurants (ideally through an automated software solution) positions the operator to easily handle tip pooling and service charge distribution, making for happy employees. That same software should be managing your payroll tax calculations as well.
Lastly, proactive managers can use tip reporting as a record of customer satisfaction and server performance. If some employees are disproportionately tipped, try to study their methods and train other servers to take on their traits.
How to Choose Software to Manage Accounting for Tips
There are some minimum requirements for helpful software in this area. Any accounting software you select to assist with tip income reporting should integrate directly with your POS system to eliminate manual and duplicative data entry. The software should also calculate payroll taxes, automating tedious, error-prone tasks. Finally, this should be software that you use daily, with the ability to handle broader financial responsibilities than just tip management.
RASI meets all these requirements and goes beyond them, integrating accounting, compliance, payroll, cash management, treasury solutions, and financial operating metrics. Thousands of restaurant operators across the nation have made RASI their software of choice for restaurant management.
When you sign up with RASI, a dedicated account team will onboard your management staff, configure the software to match your operational flows, and coach your team on how to use the software to set and meet financial goals.
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