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What Restaurant Owners Need to Know About Tips?

By November 1, 2022January 31st, 2024Business Tax Items
Restaurant Owners Service charges

Several updates and new policies were issued throughout the first half of 2022. The good news is most of these updates are quite beneficial to taxpayers. But the big question is, do you qualify for these benefits?

What Restaurant Owners Need to Know About Tips?

Most people who come to visit the US are often confused by the tipping culture. As a standard, people are expected to tip servers, bartenders, hairstylists, valets, massage providers, baristas, and more. But the question of how much to tip and who to tip is often asked. 

Tipping in the restaurant industry is very common in the united states. As per common etiquette, 20% of your total bill is the gold standard. But what does it mean for restaurant owners?

What Are the Reporting Rules for Employee Tips?

All the tips your employees receive from your clientele are subject to withholding. Your employees are expected to report cash tips to you or a person in charge by the 10th of the month after the monthly tips have been received. 

This report should include the following information:

  • Tips you have paid over to your employee for charge customers.
  • Tips the employee may have received directly from the customers. 
  • Tips received from other employees under any tip-sharing arrangement.

However, this rule only applies to tips of $20 and above within a month. Employees are not required to submit a report for any month where their tips are below the $20 threshold.

What Form Should Be Used?

Employees must report their tips using Form 4070, Employees Report of Tips to Employers, or a similar statement. It must be signed by the said employee and must contain the following information:

  • The Employee’s Name, Address, and Social Security Number
  • Your Name and Address
  • The Month or Period the Report Covers
  • The total amount of Tips Received During the Said Month or Period

What are the Restaurant Owner’s FICA Obligations?

According to the Federal Insurance Contributions Act (FICA), as a restaurant owner, you are required to pay social security tax on the amount of tips received by your employee up to and including the contribution and benefit base and also to cover Medicare Tax on the total amount of tips your employees have received. 

Employers receive a credit share when FICA taxes are paid. This means a tax credit is available to establishments in the restaurant industry. These are defined as businesses that provide, deliver, or serve food or drinks for consumption. 

Employers that qualify can claim a credit for Social Security and Medicare taxes paid for certain employees. 

Service Charges are Not Tips

Service charges are not considered tips. A service charge is a required amount a customer pays under the establishment’s terms and conditions. The service charge belongs to the establishment and not the employees.

The absence of the following creates doubt about whether a tip is considered a service charge:

  • The payment must be made free from compulsion.
  • The customer must have the unrestricted right to determine the amount given.
  • The payment should not be the subject of negotiation or dictated by an employer policy.
  • The customer has the right to decide who receives the payment

While imposing a service charge does create a fair wage system, this can also expose establishments to liabilities that cover wage and hour violations.

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