Tips your employee receives from customers are generally subject to
withholding. Your employee must report cash tips to you by the 10th of
the month after the month the tips are received. The report should
include tips you paid over to the employee for charge customers and
tips the employee received directly from customers. No report is
required for months when tips are less than $20. Your employee reports
the tips on Form 4070, Employee's Report of Tips to
Employer, or on a similar statement. The statement must be signed by
the employee and must show the following:
- The employee's name, address, and SSN.
- Your name and address.
- The month or period the report covers.
- The total tips.
Both Forms 4070 and 4070-A, Employee's Daily Record of
Tips, are included in Pub. 1244, Employee's Daily Record of
Tips and Report to Employer.
You must collect income tax, employee social security tax, and
employee Medicare tax on the employee's tips. You can collect these
taxes from the employee's wages or from other funds he or she makes
available. (See Tips treated as supplemental wages in
section 7 for further information.) Stop collecting the employee
social security tax when his or her wages and tips for tax year 2001
reach $80,400; collect the income and employee Medicare taxes for the
whole year on all wages and tips. You are responsible for the employer
social security tax on wages and tips until the wages (including tips)
reach the limit. You are responsible for the employer Medicare tax for
the whole year on all wages and tips. File Form 941 to report
withholding on tips.
If, by the 10th of the month after the month you received an
employee's report on tips, you do not have enough employee funds
available to deduct the employee tax, you no longer have to collect
it. If there are not enough funds available, withhold taxes in the
following order:
- Withhold on regular wages and other compensation.
- Withhold social security and Medicare taxes on tips.
- Withhold income tax on tips.
Show these tips and any uncollected social security and
Medicare taxes on Form W-2 and on lines 6c, 6d, 7a, and 7b of Form
941. Report an adjustment on line 9 of Form 941 for the uncollected
social security and Medicare taxes. Enter the amount of uncollected
social security and Medicare taxes in box 13 of Form W-2 (box 12 on
2001 Form W-2) with codes A and B. (See section 13 and the
Instructions for Forms W-2 and W-3.)
If an employee reports to you in writing $20 or more of tips in a
month, the tips are subject to FUTA tax.
Note:
You are permitted to establish a system for electronic tip
reporting by employees. See Proposed Regulations section
31.6053-1.
Allocated tips.
If you operate a large food or beverage establishment, you must
report allocated tips under certain circumstances. However, do not
withhold income, social security, or Medicare taxes on allocated tips.
A large food or beverage establishment is one that provides food or
beverages for consumption on the premises, where tipping is customary,
and where there are normally more than 10 employees on a typical
business day during the preceding year.
The tips may be allocated by one of three methods--hours
worked, gross receipts, or good faith agreement. For information about
these allocation methods, including the requirement to file Forms 8027
on magnetic media if 250 or more forms are filed, see the separate
Instructions for Form 8027.
Tip Rate Determination and Education Program.
Employers may participate in the Tip Rate Determination and
Education Program. The program consists of two voluntary agreements
developed to improve tip income reporting by helping taxpayers to
understand and meet their tip reporting responsibilities. The two
agreements are the Tip Rate Determination Agreement
(TRDA) and the
Tip Reporting Alternative Commitment (TRAC).
To find out
more about this program, or to identify the IRS Tip Coordinator for
your state, call the IRS at 1-800-829-1040. To get
more information about TRDA or TRAC agreements, access the IRS Web
Site at www.irs.gov and search for Market Segment Understanding (MSU)
agreements.
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