A common question that comes up for restaurants and hair salons as well as other related service industries where employees derive income from customer tips.
Form W-2, FICA, Medicare, Tips, Employee Benefits
Question: As an employer, do I have any liability if my employees receive tips but don’t report them to me?
Answer is: You have a liability to withhold and pay Social Security and Medicare tax on your employees’ reported tips, to the extent that wages or other employee funds are available.
Employees who customarily receive tips are required to report their cash tips to their employers at least monthly, if they receive $20 or more in the month. Cash tips are tips received directly in cash, by check, and charged tips.
If the employee does not report tips to you, you may be at risk of possible assessment of the employer’s share of the Social Security and Medicare taxes on the unreported tips.
If you are a large food or beverage establishment (more than 10 employees on a typical day and food or beverages consumed on the premises), you are required to allocate tips if the total tips reported to you are less than 8% of gross sales. Report the allocated amount on the employee’s W-2 at the end of the year.
Contact Fresh Start Tax for more helpful tips.