PAYDAY Workforce Solutions Blog

Employers like restaurants with tipped employees are responsible for withholding payroll taxes, making payroll tax payments, and reporting on not only wages but also tips. Employers who qualify as large food and beverage establishments may also be subject to special tips allocation and reporting rules, making restaurant payroll compliance a little more complicated than payroll for employees who don’t earn tips. Tip income can quickly become complicated, especially with peak seasonal business and large numbers of employees, but restaurants can get help with compliance from online payroll services.

Additional Tax Withholding and Reporting

Restaurant employers are subject to additional payroll tax withholding, reporting and payment requirements when they have employees who receive cash tips from customers. Restaurant employers must know the definition of “tip” for payroll tax compliance purposes. Tips are payments that customers make without compulsion. That means that mandatory gratuities added onto checks for large parties as part of restaurant operations policies are not tips, but services fees, even though they may be distributed to employees. As such, they must be taxes as wages.

Cash tips are not taxable wages unless they amount to $20 or more in a calendar month, and the employee reports them to you by the 10th of the month following the month in which they were received. Employers are not responsible for verifying the accuracy of the amount of tip income reported by employees but can encourage accurate reporting by providing Form 4070 “Employee’s Report of tips to Employer” and Form 4070A “Employee’s Daily Record of Tips,” along with IRS Publication 1244 which explains employee reporting requirements.

Special Payroll Tax Issues

Employee tip reporting errors or time lags may leave restaurant employers underfunded for tax withholdings, which can prompt a response from the IRS. The situation can get complicated quickly, and understanding how to apply funds for employee non-tip wage payments and tip income is key. Employer income tax credit may apply, a Tip Rate Alternative Agreement with the IRS may be considered, and special information returns may be required of some food and beverage employers.

Online payroll services and top payroll companies for restaurants will help with and handle these extra steps in payroll processing for restaurants. They’ll also provide payroll tax help, Obamacare help, and workforce solutions so restaurant businesses can rest assured their complicated payroll issues are taken care of and they stay in compliance.

Are You a Large Food and Beverage Establishment?

The IRS defines a large food and beverage establishment as any trade or business that is a food or beverage operation where tipping is customary and who normally employed more than 10 employees on a typical business day during the preceding calendar year. The IRS requires special tip reporting and allocation for large food and beverage establishments, so it’s important to understand if your business operation falls within this definition to comply with IRS rules.

Carry-out food operations including fast food restaurants and cafeteria-style operations are not considered operations with customary tipping. Calculating whether your restaurant employed more than 10 employees on a typical business day during the previous calendar year or on an average day, however, is still an important process for compliance. If more than 80 employee hours were worked on average days between all employees (not just food and beverage employees), your business is considered a large food and beverage operation.

This designation requires additional payroll tax processing and reporting responsibilities, including filing Form 8027 “Employer’s Annual Information Return of Tip Income and Allocated Tips” every year, and providing written statements to employees with the total tips allocated to them for the calendar year. An online payroll service can make these types of additional payroll tasks easier and more automated to help restaurants with compliance issues for tip income, as well as California minimum wage increase issues and restaurant solutions to the Affordable Care Act.

Contact us at PAYDAY to see how we can help your restaurant be in compliance with our online payroll services.

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