At what amounts do you stop withholding FICA (Federal Insurance Contributions Act) tax for the employees at your restaurant? Are your servers and bartenders meeting the correct minimum wage requirements for tipped employees? Are you required to pay FICA tax on cash and charged tips? In today’s complicated tax environment, it can be frustrating and time consuming to keep track of all of the IRS requirements and regulations to stay out of hot water. The first step to maximizing the amount of money that makes it to the bottom line is avoiding unnecessary interest and penalties from the IRS. Once the business has the basics handled, the savvy business owner goes looking for other legal ways to maximize profits. Considering it is usually easier to play by the rules rather than change the rules, education is key.
Under IRS guidelines, employees who make $20 or more in tips per month are required to report their tips to their employer every month. The IRS recommends employees utilize a daily log and provides a form that employees can track this information with located in IRS Publication 1244 (http://www.irs.gov/pub/irs-pdf/p1244.pdf). Regardless of how employees report tips to the employer, the restaurant is still required to submit IRS Form 8027 which lets the IRS know what tax monies to expect from the business for charged and reported tips. These are a couple of basic tax reporting requirements for a business that receives tips as a part of their daily operation.
Many restaurant owners and their tax professionals are not taking full advantage of the incentives the IRS provides for encouraging compliance. Form 8846, “Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips”, allows the business owner recoup the employer portion of FICA taxes paid above minimum wage to tipped employees as a deduction. With this compliance incentive offered by the IRS, why would a restaurant owner risk everything they have built so an employee can avoid taxes they are required to pay?
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