This time of year club and restaurant owners find themselves asking their accountant questions on an assortment of tax related questions for employees, specifically, tipped employees. Below, the National Restaurant Association has put together a nice summary of several tipped-employee tax related questions and answers.
• Many restaurateurs are required to file tip-reporting data with the IRS. If you operate a business where food and beverages are served for on-site consumption and tipping is customary, and you employed more than 10 workers whose combined hours exceeded 80 on a typical business day in the previous calendar year, you are required to file Form 8027 with the Internal Revenue Service for each food-and-beverage establishments. The Employer’s Annual Information Return of Tip Income and Allocated Tips is due Feb. 29 for employers who file the form on paper, or April 2 for employers who file the form electronically. Form 8027 requires employers to show gross receipts, charged tips and the amount of tips employees reported during the preceding year, among other data. Visit the IRS website to download the form and instructions.
• Restaurateurs might qualify for a federal income tax credit for the FICA payroll taxes they pay on certain employee tips. Employers are required to pay FICA payroll taxes, currently 7.65 percent, on all tip income that employees receive. The law allows employers to take a dollar-for-dollar federal income-tax credit for a portion of the FICA taxes they pay on certain employee tips. The so-called 45B credit, named for its place in the Internal Revenue Code, can yield significant savings for restaurateurs. Claim the credit by filing Form 8846 when you file your federal tax returns. The form, Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips, can be downloaded from the IRS website.
• It’s a good time to remind employees about what the law requires on tip reporting. Employees who receive $20 or more in tips in a month are required to report them to their employer at least once a month. Employees who haven’t reported and paid taxes on their tips throughout the year can declare and pay taxes on those tips at tax time. However, they could face penalties for having failed to report income the way the law requires. The National Restaurant Association sells a Tip Reporting Education Kit that includes an employer guide, employee brochures, posters and other materials to help operators convey the message to employees about how to report tips correctly.