Owners of restaurants, bars and other establishments that offer services subject to tips and who provide free meals to their employees face clear rules when it comes to tax write offs.
Many owners of smaller establishments don’t want to be bothered with the tax aspects of these transactions, and most of them don’t realize there are rules governing free meals.
Many owners mistakenly take the stance that taxes on cash tips earned by workers is between a worker and the IRS. Unfortunately, the IRS doesn’t see it that way and deems tips as paid by the employer. The agency looks to you, the employer, when determining responsibility.
If your employees earn tips, you are subject to special rules regarding the taxation of the tips.
Tips earned in excess of $20 per month are considered a form of wage and subject to payroll taxes withholding for the employee and additional payroll tax liability for the employer.
Employees must provide employers a written statement of their cash tips by the 10th of the month for the preceding month’s earnings. Click on this link to find the IRS form your worker can use to provide you with the total tips earned Employee's Daily Tip Record. If employees fail to report cash tips to you, they must report them on Form 4137 on their own income tax returns.
If your establishment accepts credit cards, be sure to include the amount of tips reported on the charge slips in the employee’s pay. If you have a tip-sharing arrangement, be sure to include those tips as well. Then calculate payroll and payroll taxes for each employee. Tips are included with other forms of remuneration when determining if the employee has reached the Social Security maximum wage base. The wage base for 2012 is $110,100.
Tips are also included when calculating FUTA tax and must be reported at year end on Form 940. On your quarterly payroll tax return, Form 941, report wages paid and on Form W2 tips are listed separately from other forms of pay. Check with your state taxing agency to determine what taxes are incurred on tip income.
If you run a large food establishment with 10 or more employees, you may be obliged to report allocated tips. See IRS Form 8027 for more information.
Most restaurants provide meals to their employees. The value of these meals is not considered taxable income to the employee and is not subject to withholding or employer share payroll taxes. This applies only if the meals are provided for the “convenience of the employer.” This particular phrase signifies something other than the fact that it’s more convenient to pay the employee in food rather than currency. You need them on premises for other business reasons to legitimize this form of compensation. If 50% or more of the employees are provided meals based on the convenience of the employer the IRS will deem that all meals are provided in that manner.
The IRS disallowed meals as a freebie in one instance when the meals were provided for free even when the employee was not scheduled to work. Because the employee could come in on her day off and eat for free, it was obviously not a meal provided for the convenience of the employer. It was instead viewed as a taxable fringe benefit.
Check with your state taxing agency to find out if the value of meals must be included in wages when calculating withholding and employer paid taxes.
Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all 50 states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, Calif., and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know.” Her new e-book Taxpertise for the Creative Mind Murder, Mayem, Romance, Comedy and Tax Tips for Artists of all Kinds is available at all major booksellers. Follow Bonnie Lee on Twitter at BLTaxpertise and at Facebook.