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November 20, 2013

Tip of the Week: IRS Says Restaurants Must Change Tip Reporting in 2014

Filed under: News — Tags: , , , , , , — Vision @ 4:30 pm

 

IRS Says Restaurants Must Change Tip Reporting in 2014

IRS Says Restaurants Must Change Tip Reporting in 2014

Effective January 1, 2014, restaurants and other employers with tipped employees must change the way certain tips are reported. Although Rev. Rul. 2012-18 took effect in 2012, examiners in some circumstances could apply it to amounts paid after December 31, 2013. Therefore, all employers must comply with Rev. Rul. 2012-18 starting in 2014.

Payments Traditionally Treated as Tips Must Now Be Treated as Service Charges

Certain payments that tipped employees receive and employers called tips must now be treated as wages. Since these wages are subject to withholding, they should be paid in the employee’s paycheck. Although there is a line on Form 941, Employer’s QUARTERLY Federal Tax Return, to report the uncollected employee share of social security and Medicare taxes on tips, there is no line to report such uncollected taxes on wages or service charges treated as wages. In order to collect and pay these taxes, therefore, the service charges should be paid on the employee’s paycheck.

Employer’s Characterization of Amounts as Tips Is Not Relevant

The Internal Revenue Service (IRS) states that it is irrelevant whether or not the payment is called a tip. According to the IRS, “the absence of any of the following factors creates a doubt as to whether a payment is a tip and indicates that the payment may be a service charge.” The four factors listed are the following:

  1. The payment must be made free from compulsion;
  2. The customer must have the unrestricted right to determine the amount;
  3. The payment should not be the subject of negotiation or dictated by employer policy; and
  4. Generally, the customer has the right to determine who receives the payment.

Mandated Tips and Suggested Tips

Examples provided by the IRS distinguish between mandated tips and “suggested” tips. In the former case, the menu dictates that an 18% gratuity will be added for parties of six or more. Since the amount is added to the charged amount by the employer and the customer did not have the unrestricted right to determine the amount, this payment is considered wages, not tips. Alternatively, if the check simply shows sample tips amounts of 15%, 18%, and 20% and the customer chooses one of the suggested tip amounts, the amount is still considered a tip for payroll tax purposes.

Service Charges Should Not Be Reported as Tips

Employees are generally required to report cash tips (including amounts paid on credit cards and received in a tip-sharing arrangement) to their employers, and those cash tips are included in gross income of the employees. Amounts determined to be wages and not tips under these provisions should not be included in the amounts reported to employers.

Contact Vision Payroll if You Have Questions on the New Rules on Tips

Be sure to contact Vision Payroll if you have further questions on Rev. Rul. 2012-18 and the new rules on tip reporting.

February 26, 2011

IRS Releases Draft Form 941

IRS Releases Draft Form 941
IRS Releases Draft Form 941
The Internal Revenue Service (IRS) recently released a draft Form 941, Employer’s QUARTERLY Federal Tax Return. The revised Form 941 will be used for reporting information for the first quarter of 2011 and later quarters. It cannot be used to report information for 2010.

Social Security Rate Is Changed on Draft Form

Since the employee social security tax rate for 2011 is 4.2%, the rate used to calculate tax on both taxable social security wages and taxable social security tips has been changed from 12.4% to 10.4%.

New Line 5e Has Been Added

The draft form includes a new line 5e to report §3121(q) notice and demand—tax due on unreported tips. Under §3121(q), when notice and demand is made for such taxes, the remuneration is deemed to be paid on the date of the notice.

Lines 6a-6d Made Inactive

Lines 6a, 6b, 6c, and 6d have been made inactive on the draft Form 941. These lines were used to report on qualified employees and exempt wages under the HIRE Act.

Contact Vision Payroll for Further Information

Contact Vision Payroll for further information on the changes in the draft Form 941.

January 11, 2011

2010 Form W-2 Tips, Part 8, Box 7 Social Security Tips

This is one in a continuing series on the 2010 Form W-2, Wage and Tax Statement, which employers must generally furnish to employees no later than January 31, 2011. Forms mailed on the due date are considered furnished if properly addressed. Employers unable to meet that deadline may file a request for extension of time to furnish the forms. Today we review Box 7, social security tips.

Boxes 3 and 7 Combined Cannot Exceed $106,800

Box 7 shows the amount of tips reported by employees. In many situations, the cash wages paid are insufficient to collect the entire amount of social security and Medicare tax. Reported tips must still be shown in this box, even if social security or Medicare tax was not withheld on them. For 2010, the combined total of Boxes 3 and 7 cannot exceed $106,800. The reported tips should be included with amounts reported in Box 1, wages, tips, other compensation and Box 5, Medicare wages and tips. Since social security benefits are based on the amount of social security tips reported to the Social Security Administration (SSA), it is important that employees periodically review their social security earnings record and provide the SSA with the Form W-2 to update any incorrectly posted earnings records.

Box 8, Allocated Tips Is the Next Topic

The next topic in this continuing series will be Box 8, allocated tips. Contact Vision Payroll with any questions on the 2010 Form W-2.

December 28, 2010

2010 Form W-2 Tips, Part 2, Box 1 Wages, Tips, Other Compensation

2010 Form W-2 Tips, Part 2, Box 1 Wages, Tips, Other Compensation
2010 Form W-2 Tips, Part 2, Box 1 Wages, Tips, Other Compensation
This is one in a continuing series on the 2010 Form W-2, Wage and Tax Statement, which employers must generally furnish to employees no later than January 31, 2011. Forms mailed on the due date are considered furnished if properly addressed. Employers unable to meet that deadline may file a request for extension of time to furnish the forms. Today we review Box 1, wages, tips, other compensation.

Box 1 May Include Several Adjustments To Gross Wages

Box 1 shows the amount employees must enter on line 7 of Form 1040, US Individual Income Tax Return. It may be, but is not necessarily, equal to gross wages. Common adjustments that increase or decrease gross wages include the following:

  • Employee elective deferral to qualified retirement plans such as §401(k) plans, SIMPLE plans, and §403(b) plans (decrease).
  • Amounts withheld for non-taxable benefits elected under §125 plans (decrease).
  • Taxable non-cash fringe benefits, such as personal use of company automobile (increase).
  • Certain clergy housing allowances (decrease).
  • Reported tips (increase).
  • Expense reimbursements paid under a non-accountable plan (increase).
  • Accident and health insurance premiums for so-called 2% S corporation shareholders (increase).
  • Cost of group-term life insurance in excess of $50,000 (increase).

Box 2, Federal Income Tax Withheld Is the Next Topic

The next topic in this continuing series will be Box 2, federal income tax withheld. Contact Vision Payroll with any questions on the 2010 Form W-2.

June 16, 2010

Tip of the Week: IRS Releases Updated Form 8846

The Internal Revenue Service (IRS) recently released an information sheet attached to 2009 Form 8846, Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips. The note on the information sheet relates to employers that have claimed payroll tax forgiveness under the Hiring Incentives to Restore Employment Act of 2010 (HIRE Act).

According to the note, employers should do the following (all line references are to Form 8846):

If any tipped employee’s wages are exempt from social security taxes, check the box on line 4 and attach a separate computation showing the amount of tips subject to only the Medicare tax rate of 1.45%. Subtract these tips from the line 3 tips, and multiply the difference by .0765. Then, multiply the tips subject only to the Medicare tax by .0145. Enter the sum of these amounts on line 4.

Contact Vision Payroll if you have any further questions on the revision to Form 8846.

January 11, 2010

2009 Form W-2 Tips, Part 8, Box 7 Social Security Tips

This is one in a continuing series on the 2009 Form W-2, Wage and Tax Statement, which employers must generally furnish to employees no later than February 1, 2010. Forms mailed on the due date are considered furnished if properly addressed. Employers unable to meet that deadline may file a request for extension of time to furnish the forms. Today we review Box 7, social security tips.

Box 7 shows the amount of tips reported by employees. In many situations, the cash wages paid are insufficient to collect the entire amount of social security and Medicare tax. Reported tips must still be shown in this box, even if social security or Medicare tax was not withheld on them. For 2009, the combined total of Boxes 3 and 7 cannot exceed $106,800. The reported tips should be included with amounts reported in Box 1, wages, tips, other compensation and Box 5, Medicare wages and tips. Since social security benefits are based on the amount of social security tips reported to the Social Security Administration (SSA), it is important that employees periodically review their social security earnings record and provide the SSA with the Form W-2 to update any incorrectly posted earnings records.

The next topic in this continuing series will be Box 8, allocated tips. Contact Vision Payroll with any questions on the 2009 Form W-2.

December 28, 2009

2009 Form W-2 Tips, Part 2, Box 1 Wages, Tips, Other Compensation

This is one in a continuing series on the 2009 Form W-2, Wage and Tax Statement, which employers must generally furnish to employees no later than February 1, 2010. Forms mailed on the due date are considered furnished if properly addressed. Employers unable to meet that deadline may file a request for extension of time to furnish the forms. Today we review Box 1, wages, tips, other compensation.

Box 1 shows the amount employees must enter on line 7 of Form 1040, US Individual Income Tax Return. It may be, but is not necessarily, equal to gross wages. Common adjustments that increase or decrease gross wages include the following:

  • Employee elective deferral to qualified retirement plans such as §401(k) plans, SIMPLE plans, and §403(b) plans (decrease).
  • Amounts withheld for non-taxable benefits elected under §125 plans (decrease).
  • Taxable non-cash fringe benefits, such as personal use of company automobile (increase).
  • Certain clergy housing allowances (decrease).
  • Reported tips (increase).
  • Expense reimbursements paid under a non-accountable plan (increase).
  • Accident and health insurance premiums for so-called 2% S corporation shareholders (increase).
  • Cost of group-term life insurance in excess of $50,000 (increase).

The next topic in this continuing series will be Box 2, federal income tax withheld. Contact Vision Payroll with any questions on the 2009 Form W-2.

July 31, 2009

Question of the Week: How Does the Increase in the Minimum Wage Affect the Tip Credit?

Filed under: News — Tags: , , , — Vision @ 10:26 pm

This week’s question comes from Hillary, a restaurant manager. I know the federal minimum wage increased to $7.25 last week. How does the increase in the minimum wage affect the tip credit? Answer: Under §45B of the Internal Revenue Code of 1986 (IRC), employers are allowed a credit for the employer portion of social security taxes (sometimes known as FICA tax or OASDI or Medicare) to the extent the tips claimed plus the cash wages paid exceeds the federal minimum wage. The credit is currently 7.65% of the excess amount and is claimed on Form 8846, Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips. Pursuant to IRC §45B(b)(1)(B), the minimum wage to be used in calculating the credit is the minimum wage in effect as of January 1, 2007 ($5.15). Therefore, the recent increase in the minimum wage does not affect the credit calculation. Vision Payroll can assist restaurants and other eligible employers in calculating the amount of tips eligible for the credit. Contact Vision Payroll if you need further information on the tip credit.

July 28, 2009

IRS Rules Distributions from Tip Jars Are Tips, Not Wages

In the recently released Chief Counsel Advice (CCA) 200929004, the Internal Revenue Service ruled that money distributed from a company’s tip jar should be considered tips, not wages.

The company requires that all its retail locations maintain a tip jar to collect cash to be distributed to certain employees. A non-management employee distributes the tip money according to a time sheet showing hours worked by eligible employees. Management employees are not eligible to share in the tips.

The company estimates an hourly amount that each employee earns and reports that amount times the number of hours worked as wages on Form W-2. The employer also instructs employees to report any amount received above this estimate as income.

Although under §3121(q) of the Internal Revenue Code of 1986 (IRC), tips are considered remuneration for FICA tax purposes (also known as OASDI or social security and Medicare), the remuneration is not deemed paid until the employee furnishes the employer with a written statement detailing the amount of tips received (see IRC §6053(a)). This notification is not supplied by the employees in this case. Since the procedures used by the company do not have the same level of control as described in Revenue Ruling 95-7, Q & A 2, the company is not liable for the employer share of FICA tax until the IRS makes a notice and demand for such taxes.

Contact Vision Payroll if you have any questions on taxation of distributions from tip jars.

July 26, 2009

US Department of Labor Issues Opinion Letter on Barbacks

The US Department of Labor (DOL) recently issued Administrator signed Opinion Letter FLSA 2009-12. Although Opinion Letters only apply to the exact set of facts and circumstances presented in each case, they are a valuable aid in understanding current interpretations of the Fair Labor Standards Act (FLSA).

In this Opinion Letter, the DOL confirmed that barbacks who receive tips from the bartenders they support qualify as tipped employees and therefore are eligible for tip credits. A barback is described as an assistant to the bartender who works the same hours as a bartender and whose primary duty is to support the bartender.

In this case, the barbacks did not directly receive tips from customers but from the bartenders they supported. The tips were more than $30 per month. Tip splitting or pooling is allowed under the FLSA in certain circumstances and the tips are allocated to the employee who retains them. Since the barbacks are “engaged in an occupation in which [they] customarily and regularly [receive] more than $30 a month in tips” they qualify as “tipped employees”.

State laws may provide rules that are more beneficial to the employee and must be followed. Contact Vision Payroll if you have questions about this Opinion Letter.

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