Your Responsibilities As A Restaurant Owner For Reporting Tips

Posted on: 23 July 2018


For wait staff, tips often make up a large percentage of the wait staff's income. If your business is allowing customers to accept tips, you will need to be prepared to perform the accounting necessary to report these tips properly.

Cash Vs. Credit Cards

With cash tips, the process is not as difficult. The wait staff keep the tips and are required to report any tips they earn. However, customers often do not have cash and rely on credit card tips. However, with credit cards, you must have a system for separating the tips from payment for other services.

Automatic Gratuities

If there is a gratuity that is automatically added at the end of a tip for large parties, this does not necessarily go to the server. The restaurant has the option of keeping this extra fee and will have to report it to the IRS as revenue. For a tip to be considered a tip, the customer must be allowed to make the tip free from compulsion. The customer is given full freedom to determine the amount of the tip. There must be no negotiations involved in determining the tip amount. Also, the customer must have control over who receives the tip. This could be the wait staff, a busboy, or anyone else. 

The Importance of Reporting Tips

When the money is considered a tip, the wait staff is required to report the tip. Those who fail to do so are engaged in tax evasion and could potentially be prosecuted. Also, the taxes are considered part of the wait staff's income, and not reporting tips can lead to the employee having a more difficult time qualifying for loans.

Because you are also required to report the tips your wait staff earns, have a system in place where wait staff report any tips they have earned at the end of their shifts. You must then pay witholdings to the IRS. If you own a large restaurant, you may be required to fill out Form 8027, which reports the total number of gratuities you have collected. 

Because of the challenges in handling payroll accounting as a restaurant, you may want to take advantage of one of several payroll accounting services from firms like Monheit Zongolowicz Frisch CPAs. It can be tempting to try to do everything on your own, but this can lead to errors that can cost your business revenue. Professional accounting services can also help you determine if there are any special forms you must fill out.