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Tax Tips for Restaurant Employees

September 20th

When you are mostly paid in cash, as many wait staff are, it is tempting to keep much of the amount undeclared. However, this is strongly inadvisable. The IRS is always watching; if you fail to declare part or all of your income garnered through tips, you could be facing heavy penalties and interest on unpaid taxes.

By following these tips, restaurant owners and employees can ensure tax compliance and avoid damaging IRS penalties.

  • All employees must report tip income on a Form 4070, Employee’s Report of Tips to Employer. This form is due the tenth day of the month after the tips were received, and must be signed by the employee. However, no report is necessary in months where total tips equal less than $20.
  • Employers are required by law to collect tax on employees. They must collect income tax, employee social security tax, and employee Medicare tax. These taxes may be collected either from the employee’s wages or from other funds the individual makes available.
  • Employers must ensure that the total amount of tip income reported during any pay period is, at the very least, equal to eight percent of the total receipts for that time. This eight percent does not include any non-allocable receipts, which includes any receipts for carry out sales or receipts with a service charge of ten percent or more. If the total amount of tips reported by the employees is less than eight percent, the employer is required by law to allocate the difference between the actual tip income and the amount which equals eight percent of gross receipts.

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