As a business owner, something you need to understand well is what you have to do for your employees in terms of their tips and taxes. Employers in the United States are required to withhold taxes from their employees’ tips and wages.
When you hold those tips, it’s your responsibility to take out income taxes and each employee’s required Medicare and Social Security taxes. There are other responsibilities that you have as well. Some include:
- Identifying noncash tips
- Tracking cash tips
- Recording tips split in tip pools or other sharing arrangements
All tips, whether they are in cash or non-cash, are subject to taxation through the Federal government. Any cash tips are also subject to Medicare and Social Security taxes.
Is there any exception to having to pay taxes on tips?
Yes, if the total number of tips recorded by an employer is under $20 for the month, then no taxes are charged and the tips don’t have to be reported. This is not $20 per employee but rather $20 overall.
What should you do if you forget to record tips?
It’s important to record all tips received. If you do not remember to do so, you should ask your employees for their tip records to verify how much needs to be taken out for taxes. Failing to file taxes on these tips could lead to serious trouble with the IRS if your business is ever audited.
What should you do if the Internal Revenue Service contacts you about an audit?
If your business is going to be audited, it’s important to talk to your attorney about the steps to take next. While an audit itself won’t necessarily lead to penalties, if it’s discovered that taxes were intentionally withheld or there are signs of fraud, then the IRS may try to take further action against you. Your attorney can help you fight the allegations that you may face and help represent you if you’re being investigated by the IRS during an audit. It’s in your best interests to have your records prepared and someone on your side to minimize the risk of harsh penalties from the IRS.