Yes. Employers in industries where tipping is common know that they must report and pay taxes on tips employees report to them. However, many employers don't realize that they're liable for the employer share of social security and Medicare taxes on tips employees don't report to them.
- Tipped employees are required to report their tips to their employers by the 10th of the following month if they receive cash tips of $20 or more in the month. If the 10th falls on a Saturday, Sunday, or legal holiday, your employee must report tips by the next day that's not a Saturday, Sunday, or legal holiday. Cash tips include tips they receive directly from customers, charged tips (e.g., credit and debit card charges) you distribute to them, and tips they receive from other employees under any tip-sharing arrangement. Thus, both directly and indirectly tipped employees must report tips received to their employer.
- You, as an employer, must withhold and pay the employee share of social security and Medicare taxes on tips your employee reports. You can collect these taxes from the employee’s wages or from other funds he or she makes available. You must also pay the employer share of social security and Medicare taxes on all reported tips.
- For unreported tips, your liability for the employer share of social security and Medicare taxes doesn't arise until the Service issues you a Section 3121(q) Notice and Demand. The tax due shown on the notice and demand may be based on tip audits, data from Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips or Forms 4137, Social Security and Medicare Tax on Unreported Tip Income. The employer isn't liable to withhold and pay the employee share of social security and Medicare taxes on unreported tips.
- You must file Form 8027 if you operate a large food or beverage establishment. A large food or beverage establishment is a food or beverage operation located in the 50 states or in the District of Columbia that provides food or beverages for consumption on the premises and has employees who customarily receive tips. Additionally, the employer must normally employ more than 10 employees on a typical business day during the previous year. If you're the employer at a food or beverage operation, see the Instructions for Form 8027 to determine if you must file this form. You may also be required to allocate tips if the total tips reported to you are less than 8% of gross receipts. Report the allocated amount on the employee's Form W-2, Wage and Tax Statement.
- Form 4137 is used by employees to report and pay their share of social security and Medicare taxes on tips they didn't report to you. This should include any allocated tips shown on Form W-2, unless the employee has adequate records (a daily tip record or other credible evidence) to show that the employee didn't receive the allocated tips.
- Tip allocation is only required when the amount of tips reported by employees of a large food or beverage establishment is less than 8% (or an approved lower rate) of the gross receipts (other than nonallocable receipts) for the given period.
- If the employees are reporting 8% or more, there would be no allocated tip amount.
- The employer must still file Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips.
- The employer is also still required to withhold and pay taxes with regard to all reported tips.
- Publication 1239, Specifications for Filing Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips, Electronically
- Reporting Tip Income - The Jill and Jason Show
- Publication 1244, Employee's Daily Record of Tips and Report to Employer
- Publication 15, Circular E, Employer's Tax Guide
- Instructions for Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips
- Publication 531, Reporting Tip Income