Do your workers earn tips? If so, using Form 4070 from the IRS will help you keep the books accurate. This form acts as an “Employee’s Daily Record of Tips”. It enables you to track how much your employees are earning in tips each payroll period. That means it allows for more accurate reporting when it comes time to file your Employer’s Quarterly Payroll Tax Return.
At the end of the year, you will also need each employee’s total tip earnings for their W2. This article will clear up some common questions and concerns about tip reporting requirements.
Understanding Your Tax Liability for Employees’ Tips
Regardless of the source, any income a person receives is generally taxable. The tips your employees get are no exception to that hard and fast rule. Your employees’ tips will always be subject to Federal income tax. And if an employee makes $20 or more in a one-month period from tips, they also need to pay FICA taxes on them. FICA consists of both Social Security taxes and Medicare taxes.
You might make the mistake of thinking that, since your employees are the ones receiving the tips, they aren’t of your concern. However, this common assumption is very incorrect — and it can cost you big time.
As the employer, you have the responsibility of filing a W-2 for each of your employees each year. This W-2 form must include their tip income in order to be accurate. Tips are most certainly the property of each respective employee. So, you cannot take tips from workers or reduce their income to offset the tips they make. But you still have to have reporting requirements in place for tax purposes.
Using Form 4070
Your employees must keep a daily record of their tips. If they make more than $20 in tips in a month, they must report it to you for tax purposes. This is where Form 4070A comes into play.
Employees can use this form to keep a record of their tips to easily and consistently report the info you need. Form 4070 makes keeping a record of tips simpler for your employees. However, they do not have to use any particular form to report tip income to you. The only requirement is that they give you a signed statement every month including the following.
The name, address, and Social Security number of the employee
The name and address of the employer
The specific time period the report covers
The total amount of tips earned during that month or period
If you think your business can loosen up on reporting requirements by pooling employee tips or having a shared jar, think again. Each employee still needs a record of their portion. After all, the IRS will still require tax reporting. How you handle reporting in these scenarios will depend on your policy.
A “service fee” can also count as a tip. But a gratuity charge you add to the receipt of a large party may not. Knowing what qualifies as a tip and what doesn’t is important. Otherwise, tip income may not get reported properly.
And it’s not just you who needs to be in the know. Since your employees are the ones handling the reports in this case, they are the ones who need to get educated.
The Importance of Employee Education
The tax liabilities of any business can definitely look like a burden. But properly reporting employees’ tip income just comes with the territory. Failure to do so properly could end up having a huge impact on your business.
However, the biggest issue most service businesses face is employees’ unwillingness to report tip income in full. Some do not want to report their tips, knowing they will have to pay taxes. But a lot of them will not report tip income simply because they don’t know they really have to. For a lot of employees, it’s a matter of proper education.
Help your employees understand their tax obligations. And, if needed, tell them the consequences that could arise. Let them know what could happen if they fail to report all their tip income. After all, they need to know that they aren’t really reporting it to you. You’re reporting it on their behalf to the government (on their W-2).
Proper education is key. By investing time into it, you will be able to clear up a lot of confusion. This requires you to educate yourself first. Figure out what counts as a tip and what doesn’t. Frame things in the context of your business. If in doubt, ask an accountant for help. Once you have things figured out, share the knowledge with your workers.
Failing to report tip income could result in fines and back-due taxes, among other things. Teach your employees about their tax reporting requirements. In doing so, it will help make sure that they get you accurate reports on-time. In turn, you will be able to carry out your reporting requirements more easily.
As you’re educating your employees, be sure to remind them what they need to report. They need to track both cash and non-cash tips.
Cash tips include change, paper money, debit/credit card charges, and so on. Non-cash tips could be anything with value, like free tickets they receive in exchange for their service to a customer.
They will need to tell you about all cash tips. But employees do not have to report non-cash tips to their employer. However, they do need to keep a record of non-cash tips (and their value). That’s because they will need to report both on their individual income tax return at the end of the year.
Know Your Tax Liabilities
Failure to understand and abide by tax reporting requirements will cost your business. But the laws can get confusing fast. That’s why Honest Buck has set out to make understanding your tax liabilities as simple as possible. Need help? We can make sure you’re in compliance to keep your business running smoothly.