There are two things that are considered a certainty in the United States, death and taxes, and payroll taxes are one of the types that everyone who works is supposed to pay. Payroll taxes are paid by employers based on the earnings of the individual. In most cases it is easy to determine how much a person makes. They either earn a salary or they are paid based on the number of hours they work. Either way, the employer is responsible for reporting these amounts to the federal government and making sure that all of the payroll taxes are paid in a timely fashion. Problems arise when a person receives part of their wages from a source other than the employer. This extra income is often in the form of tips and is not always as easy to track.
Paying the Payroll Taxes
The problem with tips is that the employer may or may not know how much an employee collects. Tips are often done in cash and the job of reporting how much they receive will often fall on the individual. Tips are given by a person to the employee for the service that they provided. The amount of the tip is up to the person that is giving it. It can be a very small amount or it can be a very large amount. No matter what the size of the tip, it is considered a part of the individual’s income that is subject to payroll taxes.
The employer is obligated to report the amount of income that a person is earning that includes any tips. If an employee fails to report the correct amount of tips that they received, it does not absolve the employer of the responsibility of paying the payroll taxes on it. The government will only go after an employer for unpaid taxes on unreported tips if they have found out that the employee has not provided truthful information. At that point the employer will have to pay any payroll taxes that are due.
Businesses do not want to get caught by surprise with a big tad bill when their employees are not reporting tips accurately. They can take steps that can help insure that the information that the employee is accurate.
What Can the Employer Do?
Since the employer is responsible for reporting the tips to the government, they need to take steps to make sure they are reporting an accurate amount. One of the things that is making this easier is the increased use of credit cards as a form of payment. When the credit cards are used and a tip is added to the credit card there is a record of the amount that was paid. Food service employers can work with an IRS program that gives them more ways to make sure the employees are reporting tips accurately. These programs give the business the ability to stress compliance with their employees without putting the business at risk for larger tax bills.
Food and beverage establishments are the one most often associated with tipping. Large companies in this industry can report the tips as 8% of the gross sales of an employee. This gives them an easy way to calculate the amount of tips earned that takes the onus off the employee for reporting. Anything over that 8% that is earned should be reported by the employee, but there is no guarantee it will happen. A larger operation is one that uses more than 10 employees on any typical business day.
Small operations in the restaurant industry do not have to use this 8% rule and are reliant on their employees for reporting tips. The same holds true for any other industry where tipping is allowed. It is possible for the 8% of gross sales to be used in the other operations when determining the amount of tips earned.
Most people assume that people do not report all of the tips they earn. It is something that is too easy to get away with. Unless there is some type of paper trail on the tip, finding proof that someone received it can be very difficult. Despite that, a business has an obligation to report tips as accurately and honestly as possible. A good employer will make sure that all employees understand what this means for them and the impact it can have on their job.
No one really likes paying payroll taxes, but it is a necessity. A smart business will want to make sure that they are paying the payroll taxes they owe honestly and in full. It can prevent many other problems down the road. When it comes to tipping and payroll taxes, it is not something that should be ignored.