Consultant’s Corner: Tax Treatment of Tipped Employees
Question: Are tips received and reported by a waitress taxable for unemployment calculations?
Tips reported by a restaurant waitress to an employer are taxable for unemployment tax calculation purposes, subject to certain thresholds and guidelines. Also, there are additional tax treatment considerations for different types of food service businesses and tip and gratuity procedures that you may want to be familiar with. You can review tax industry and IRS information regarding payroll taxes and other tax implications for tipped employees. Generally speaking, here are some important rules for determining whether cash tips are considered taxable wages:
- Cash tips are only taxable wages if they total $20 or more in a calendar month
- The employee must report the cash tips to the employer by the 10th day of the next month after receiving the tips
- All cash tips are considered wages once the $20 threshold is reached, including the initial $20.
Employer Tax Withholding and Payment Obligations
Even though you are not in direct control over the amount of tips received by employees, you are still responsible for withholding federal, state and local (where applicable) income taxes and FICA (Social Security and Medicare) taxes on reported tips and for paying the employer’s portion of the FICA, FUTA (federal unemployment) and SUTA (state unemployment) taxes on them. You are also responsible for withholding the 0.9% FICA Medicare surtax, or Additional Medicare Tax. Tips become subject to Additional Medicare Tax withholding if, in combination with other wages paid by the employer, they exceed the $200,000 withholding threshold.
Related: 11 Commonly Overlooked Tax Deductions
For more information on this topic, please review the following articles from the IRS:
Withholding and Reporting | IRS.gov
Employer’s Tax Guide | IRS.gov
Restaurants Tax Center | IRS.gov
