The busy holiday season generally means more business for restaurants. Things are so busy in some restaurants that servers and bartenders can earn more tip income this time of year than at any other. As a payroll service provider with specialized solutions for restaurants, we want to encourage our clients to not forget the basic rules of reporting tip income as we close in on the end of the year.
Some restaurant owners allow their bartenders and servers to keep 100% of the tip income they earn. Others collect tip income and then redistribute it equally. Still others don't pay any tip income to servers and bartenders. Regardless of the arrangement, employers still have a responsibility to report all tips earned and, where applicable, withhold federal and state taxes.
Both employees and employers are required to track and report tip income. A qualifying in-house electronic system is acceptable as long as it meets the requirements of federal law. However, paper forms are the more common way of handling reporting. There are two forms to be cognizant of:
- Form 4070 – This is the Employee's Report of Tips to Employer form. Servers and bartenders submit it to their employers to report all tip income earned over specific amount of time.
- Form 4070A – The Employee's Daily Record of Tips form is also filled out by the employee but not submitted to the employer. Employees keep these forms for their own records.
In situations in which servers and bartenders do not receive any tip income because it is collected and retained by the employer, neither of these forms is required. However, the employer still must keep track of the money collected as business income.
The task of calculating withholding taxes is where all of this gets complicated. A good payroll tax calculator could come in handy. Having said that, employers are required to withhold their employees' share of federal and state payroll taxes on all tips earned, regardless of whether those tips are retained fully by employees or shared equally among all of them.
Employers use the data from collected 4070 forms to calculate income, Social Security, and Medicare taxes on BOTH wages and tip income. Even though tip income is reported in a separate box on the W-2 form, tax withholding still applies.
Also note that taxing authorities do not care where the money comes from as long as taxes are paid and employees receive every penny due them. Employers can withhold from hourly wages, the tips themselves, or even the restaurant's general income.
Contact Us for Help
This quick reminder about restaurant payroll covers just the most basic aspects of how to handle tip income. There is actually a lot more to restaurant payroll than we've covered here. If you own or run a restaurant and you are finding payroll more complicated than you have time for, we encourage you to contact BenefitMall. We offer a specialized restaurant solution that streamlines payroll, mitigates errors, and frees up owners and managers to devote more time to their customers.
BenefitMall offers cutting edge payroll solutions for companies of all sizes, in just about every sector. We take great pride in the flexibility our payroll products offer. Whether a company is looking for a full-service payroll solution or a less comprehensive package that involves shared responsibilities, we have something that will do the job.
The holiday season is now upon us. If you're a restaurant owner, make sure to pay special attention to tip income for reporting and withholding purposes. Let's all end the year on a good note.