As a business owner, you know how to deal with your employees. You appreciate them, help them deal with their stresses and be more productive. But what do you do as an employer to handle employees that receive tips as a part of their wage?
What is a ‘Tip’?
This seems like a simple question, but it turns out that the definition of a ‘tip’ may be different than what you think. According to the IRS, a ‘tip’ must meet four specific conditions:
- The payment must be made free from compulsion;
- The customer must have the unrestricted right to determine the amount;
- The payment should not be the subject of negotiations or dictated by employer policy; and
- Generally, the customer has the right to determine who receives the payment.
Many types of businesses involve tips. Of course, restaurants immediately come to mind, but other establishments also have a payment structure dependent on employees receiving tips. These include hotels, clubs, bars, and more.
Tip vs. Service Charge
Often, the difference between tips and service charges can seem like a gray area. Service charges are often added to a customer’s check involuntarily. Examples of this include ‘automatic gratuities’ for large dining parties, banquet fees, room service charges, bottle service charges, etc. When paid to employees, these types of charges are typically considered non-tip wages, even if the employee calls the payment a tip or gratuity. An accountant can help you differentiate between the two as it pertains to your business.
What is a ‘Tipped Employee’?
As you would expect, a tipped employee is an employee that regularly receives tips as a part of their compensation. This includes servers, bartenders, valets, taxi drivers, artists, service providers, and many more.
Typically, there is a baseline dollar amount established in order for an employee to be considered a ‘tipped employee.’ The amount of money an employee receives via tip is taxable (if they make more than $20 in a month) and you must report this on the employee’s W-2 form.
It is important to note that tipped employees must still be paid the service rate for tipped employees, currently $3.75 an hour. These employees must also make at least minimum wage once tips are included. In Massachusetts, the minimum wage is currently $11 an hour (as of January 2017).
How to collect and report tips
Employees get to keep the tips that they earn but must report the dollar amount to the business. How often this is done is up to you, but it is generally considered easiest to do after each shift.
Some workplaces have pooled tips, in which case the employees divide tips among themselves based on their own arrangements. Even in this scenario, they are required to each report their earnings to you so that you may in turn report it to the IRS.
Dealing with credit card tips
Nowadays, most customers seem to use credit cards. Not having to deal with cash can be a good thing but makes tips a bit more complicated. Your employees are still entitled to their earned tips, but (in some states) you may reduce the amount given based on the transaction fee charged to you by the credit card company.
Tipping and your business’s taxes
As a Massachusetts business owner, it is your responsibility to collect and report all income earned by your employees, including their tip income. Make sure that employees are reporting all of the tips that they receive, whether via cash or credit (or any other form of payment). This amount should be reported on each employee’s wage report, and you should withhold income taxes and FICA taxes on the total amount.
For help with your business’s finances talk to a Massachusetts accountant. We can refer you to someone that will help answer all of your questions and get you on the right track! (If you ever need a referral for a Boston area professional, just ask your Vargas and Vargas Insurance agent – we work with lots of professionals in the area, and can probably connect you with the right person to answer your questions or help you with what you need.)
Unreported Tips
You trust your employees to report all of their tips to you as mandated, but you should know that if for some reason an employee does not report all of their tips, the IRS will not hold you liable. You must still, however, always do your de diligence to get your employees to report their earnings in full.
For more Massachusetts small business tips, stay tuned to the Vargas and Vargas Insurance Blog. And for the best business insurance in Boston, call 617-298-0655 for a free quote! Our business insurance agents will make sure that you get a policy that will protect all aspects of your business, from your property to your inventory, from your customers to your employees, and much more.
