Dirty Tips: Which Small Business Tax Law Do These Break?

Tips are very common in the restaurant and bar industry, but they are common in other industries as well. When was the last time you tipped someone outside of the food service business? Was it a hotel staff member, your VIP valet service, your masseuse or manicurist? It could have also been a moving company employee or your local tire repair shop technician.

As a payroll specialist for small business owners, we want to warn you that you should be aware that you are held to a more strict law regarding tips because the IRS requires the total amount of tips equaling more than eight-percent of all gross income for each employee must be reported during income tax season. Form 8027 helps the IRS to see the correlation of reported tips and gross income receipts.

Dirty tips are those that are under-reported to the IRS. If your employees are not being held accountable for reporting tips past the eight-percent threshold, your payroll manager and your employee could be subject to tax audits, specifically a tip examination, from an agency member. That, of course, is the worst case scenario. There are ways to educate and be more aware of these small business tax implications.

How can you communicate the importance of reporting tips?

  • Most small business owners require their employees to at least preview and then voluntarily sign an agreement with the business about under-reported tips and their consequences
  • Publish tip reporting laws in an area frequented by all employees for awareness
  • Consistently address tip reporting procedures to employees through written and verbal reminders
  • Provide blank Form 4070s for daily tip recording
  • Install and regularly review hidden surveillance cameras to track any suspected underreported tipping or even money or product theft

Depending on your industry, you also need to be aware and reminded of some other laws in place for business owners. Because of The Fair Labor Standards Act (FLSA) and other federal laws set into place, minimum wages vary per state. This is especially of importance to industries that allow tipping as a customary measure.

If your employees receive tips, you are eligible for tip credits. This means you can pay as little as $2.13 hourly to these employees as long as they make up the remaining income to the state’s minimum wage via tips. Because each state varies for their minimum wage requirement, the tip credit will vary based on that number minus the bare minimum of $2.13. Pay special attention if your state has legislative measures in place to cap your maximum tip credit amounts though.

Tips can be easy or complicated when it comes to small business management. Consider outsourcing your payroll to have a second pair of eyes on your business. The payroll services at Padgett Payroll® have helped many business managers throughout North America for over 40 years. We have become financial experts with proven methods to cut costs and improve efficiency. Get started with your quote today!

Do you have the support you need to manage your small business bookkeeping? Contact us to schedule an appointment to speak with a local small business advisor.