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Reporting Tip Income - Restaurant Tax Tips

Tips your employees receive from customers are generally subject to withholding. Employees are required to claim all tip income received. This includes tips you paid over to the employee for charge customers and tips the employee received directly from customers.

Employer Requirements

Employers must collect income tax, employee social security tax and employee Medicare tax on tips reported by employees. You can collect these taxes from an employee's wages or from other funds he or she makes available.

Allocation of Tips

As an employer, you must ensure that the total tip income reported to you during any pay period is, at a minimum, equal to 8% of your total receipts for that period.

In calculating 8% of total receipts, you do not include nonallocable receipts. Nonallocable receipts are defined as receipts for carry out sales and receipts with a service charge added of 10% or more.

When the total reported to you is less than 8%, you must allocate the difference between the actual tip income reported and 8% of gross receipts. There are three methods for allocating tip income:

  • Gross Receipt Method
  • Hours Worked Method
  • Good Faith Agreement

Source: Internal Revenue Service IRS.GOV

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