When most of your compensation is paid in cash, many wait staff are, understandably, tempted to keep much of the cash undeclared. However, this is simply a bad idea. The IRS is always watching; if they determine you failed to declare part (or all) of your tips, you'll be facing penalties and interest on the unpaid taxes due.
By following these tips, restaurant owners and employees can ensure tax compliance and avoid damaging IRS penalties:
* All employees must report tip income on a Form 4070, Employee’s Report of Tips to Employer. This form is due the tenth day of the month after the tips were received, and must be signed by the employee. However, no report is necessary in months where total tips equal or are less than $20.
* Employers are required by law to collect tax on employees, including income tax, employee social security tax, and employee Medicare tax. These taxes may be collected from either the employee’s wages or from other funds the individual makes available.
* Employers must ensure that the total amount of tip income reported during any pay period is, at the very least, equal to eight percent of the total receipts for that time. This eight percent does not include any non-allocable receipts, which includes any receipts for carry out sales or receipts with a service charge of ten percent or more. If the total amount of tips reported by the employees is less than eight percent, the employer is required by law to allocate the difference between the actual tip income and the amount which equals eight percent of gross receipts.
If you have further questions, don't hesitate to call 423-622-3156 and I will be happy to help.