Many employees in the service industry receive tips. This means employers have to report tips for tax reasons. Here are the legalities to know
For many American workers, tips are the difference between poverty and financial comfort.
That means that tip income is highly relevant to employers as well.
If you employ people who depend on tips, you may be wondering about your reporting obligations in relation to these tips.
So, do you have to report tips as an employer? Read on to find out.
Do Employers Have to Report Tips By Law?
The short answer to this question is yes. However, there are a host of different reporting rules in this area that you should be aware of.
Employees have to report all of their cash tips to their employer if their monthly tip amount exceeds $20. This means that practically all service employees will have to make these reports.
Employers must collect employee tip reports. These detail the number of tips received on a monthly basis.
Employers may request more frequent tip reports than that, but this is the minimum required by law. Employees are required to update their tip record daily.
After collecting these reports, employers must withhold the relevant taxes and make a report to the IRS. Manually filing paystubs from your real check stub maker in respect of all of your employees can be a tedious and time-consuming task. It can be a good idea to use an online paystub generator free of charge to help expedite the process.
What Are the Taxation Requirements in Terms of Tips?
Employers must withhold the relevant income and FICA taxes on tip income as they do with regular earnings.
Employers must also match the amount paid by the employee in FICA taxes, as is the case with regular income.
How Does Tip Credit Work?
As an employer, taking tip credits can save you significant wage costs. If your employees earn tips, you can use this income to make up a certain amount of their minimum wage.
The minimum you have to pay an employee is usually $7.25 an hour. This is the national minimum wage; some states have a higher minimum than this.
If your employee earns tips, however, you can reduce the number of wages you pay them to as low as $2.13 an hour. However, you can only reduce it to the point at which the employee’s overall earnings remain at minimum wage level.
What If an Employee Doesn’t Report Tip Income to Me?
Dealing With Tips the Right Way
As an employer, knowing how to report tips is only half the battle. Tip income gives rise to a number of differences in terms of employee pay and taxation.
However, with knowledge on your side, you’ll get used to all the requirements in no time.
Did you find the information in this article helpful? If so, be sure to check out some of our other posts. We post about anything and everything to do with employment law, so you don’t want to miss what we have to offer!
