Restaurants and Tip Income

How are tips affected by taxes? What are the different methods of assigning tip income? Are there credits to be taken as a restaurant owner? All of these are valid questions that need to be answered when figuring taxes for a restaurant.

Total Receipts

Restaurant employers must make sure that total tip income reported back to them during a pay period is at least 8% of the total receipts for that period. If the total tip income is less than 8%, an employer must allocate the difference between the actual tip revenue and 8% of gross receipts. When doing this, there are three methods available to use: the gross receipt method, hours worked method, and the good faith agreement. However, employers have the option to file an application to request a rate lower than 8%.

Tip Tax Credit for Restaurants (FICA Tip Credit)

A restaurant may be in line to receive a credit under Internal Revenue Code (IRC) section 45 B, Credit For Portion Of Employer Social Security Paid With Respect To Employee Cash Tips if employees receive tips from patrons for providing food or drinks and if the employer paid employer social security and Medicare taxes on the tips received by the employees.

How Much is the Credit?

The tax credit is equal to the social security and Medicare taxes paid by the employer on the tips received by employees.

When, Where, and How?

The credit can be claimed for up to three years from the due date of the particular year’s return and is to be claimed on form 8846 (Credit for Employer Social Security and Medicare Taxes on Certain Employee Tips). This credit is considered an income tax credit and can offset any usual income tax liability, but not employment tax liabilities.

Large Employers

To be considered a large employer, a restaurant must meet the following requirements: food or drink is consumed, tipping is the norm, and there must be more than 10 employees who work more than 80 hours on an average business day in the preceding calendar year.

The Employee

As an employee of a restaurant that receives tip income, the tip income must be reported on Form 4070 (Employee’s Report of Tips to Employer) or on a similar statement. If an employee receives less than $20 in tips in a month, a report is not required.

Whether you are an employee or an employer, we are here to help you meet your reporting requirements and provide guidance throughout the tax process. Call Lescault and Walderman today at 866-496-2042.