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We offer year round Tax Service and electronic filing for both personal, corporate, and non-profit tax returns. Setting up a new business? Have questions? We can help. We offer a no charge consultation. Are you processing your own payroll? Are you being overcharged by a big National Payroll Company? We can help! We have been processing payroll for many local and National companies for over 30 years and we’ll take care of the headache of payroll taxes for you. Contact us for a quote on our payroll service today.

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ASY has one office space available for lease at our office.  It is approximately 150 sqft.  This includes all utilities and Internet service. You would also have access to our spacious conference room for meetings. Contact David for more information.

 

 

Guide for Reporting Tip Income by Employers & Employees

MIKE D’AVOLIO, CPA, JD

SEPTEMBER 2, 2019

Employers and employees in the service industries that involve tipping need to comply with a unique set of tax rules.  Like wages, you must pay income tax, Social Security tax and Medicare tax on tip income. Tax professionals can share the following guide with clients and prospects to educate and encourage them to stay compliant with the rules.

Basics

In general, tips are discretionary payments made by customers to employees and can be paid in cash, credit cards, noncash (such as tickets) and through tip pools from other employees (indirect tips).  To qualify, the tip must be voluntary and the amount cannot be negotiated. 

On the other hand, service charges are required to be paid by the customer even if it’s called a tip or gratuity.  Examples of service charges include an automatic gratuity for a large dining party, a banquet event fee, a hotel room service charge and a bottle service charge.  In general, service charges are reported as non-tip wages paid to the employee, excluding the portion retained by the employer.

Reporting tip income

Employees must report all cash tips received to the employer, except total tips under $20 for a given month.  Employees need to report tips to the employer by the 10th of the month after the month the tips are received. Noncash tips received from customers are not reported to the employer.

All cash and noncash tips are required to be included in the employee’s gross income and are subject to tax.  Both direct tips and indirect tips (e.g. bussers and cooks) must be reported to the employer, but you can reduce the number of reportable tips you share with other employees.  For example, if you receive a $150 tip and give the bartender $25, you would only report $125.

Employer requirements:

  • Retain employee tip reports
  • Withhold income taxes and the employee’s share of FICA taxes
  • Pay employer’s share of FICA taxes
  • File Form 941, Employer’s Quarterly Federal Tax Return along with federal deposits
  • Include tip income on Form W-2, Box 1 (Wages, tips & other compensation), Box 5 (Medicare wages and tips) and Box 7 (Social Security tips)

Reporting service charges

Service charges that are distributed to an employee by an employer are treated the same as regular wages. Service charges are:

  • Not included in the employee’s daily tip record
  • Included on Form W-2, Boxes 1, 3 and 5
  • Subject to FICA taxes and income tax withholding

Allocated tips

If the total tips reported by all employees at a large food or beverage establishment (see below) are less than 8 percent of gross receipts, the employer is required to allocate the difference between 8 percent of gross receipts and the actual tip income among all employees who received tips.

If the employer allocates tips:

  • They are shown separately on Form W-2, Box 8 (Allocated tips)
  • They are not included in Boxes, 1, 5 or 7 (i.e. income tax and FICA is not withheld since the employee didn’t report the amount to the employer)
  • The employee includes the allocated tips in income and files Form 4137, Social Security and Medicare Tax on Unreported Tip income

Large food or beverage establishments

An employer who operates a large food or beverage establishment must file Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips.  The report includes receipts from food and beverages, tips reported by employees and allocated tips.

An establishment is considered a large food or beverage establishment if all of the following requirements are met:

  • The operation is located in the 50 states or D.C.
  • Food or beverages are provided for consumption on the premises, excluding fast food operations
  • Tipping employees for food or beverages by customers is customary
  • The employer normally employed more than 10 employees on a typical business day during the preceding calendar year

Employer’s share of Social Security & Medicare taxes on unreported tips

If an employee fails to report their tips to the employer, the employer is not liable for the employer’s share of Social Security and Medicare taxes (FICA) on the unreported tips until the IRS notifies and demands the taxes.  The employer is not liable to withhold and pay the employee’s share of Social Security and Medicare taxes on any unreported tip income.

Voluntary tip compliance agreements

The IRS has established voluntary tip compliance agreements for industries where tipping is customary, such as restaurants and bars.  Among the benefits, the agreements help the employer and employee understand and meet their tax obligations through education, instead of through enforcement and examination actions by the IRS.

Wrap-up

As discussed, the rules surrounding the proper reporting of tip income offer a few twists to reporting typical wages.  The bottom line is that tip income is taxed just like wages.  Be sure your employer and employee clients that work in the service industries remain compliant with these filing requirements.

IRS resources

Employers who provide leave might qualify to claim valuable credit

Employers who provide paid family and medical leave to their employees might qualify for a credit that can reduce the taxes they owe. It’s called the employer credit for family and medical leave.

Here are some facts about the credit to help employers find out if they might be able to claim it.

To be eligible, an employer must:

  • Have a written policy that meets several requirements.
  • Provide:
    • At least two weeks of paid family and medical leave to full-time employees.
    • A prorated amount of paid leave for part-time employees.
    • Pay for leave that’s at least 50 percent of the wages normally paid to employees.

Applicable dates:

It’s available for wages paid in taxable years beginning after Dec. 31, 2017, and before Jan. 1, 2020.

The amount of the credit:

The credit is generally equal to 12.5 to 25 percent of paid family and medical leave for qualifying employees. The percentage is based on how much employers pay each employee for family and medical leave.

Qualifying leave:

The leave can be for any or all the reasons specified in the Family and Medical Leave Act:

  • Birth of an employee’s child.
  • Care for the child.
  • Placement of a child with the employee for adoption or foster care.
  • To care for the employee’s spouse, child, or parent who has a serious health condition.
  • A serious health condition that makes the employee unable to perform the functions of their job.
  • Any qualifying emergency due to an employee’s spouse, child, or parent being on covered active duty in the Armed Forces. This includes the taxpayer being notified of an impending order to covered active duty.
  • To care for a service member who is the employee’s spouse, child, parent, or next of kin.

Claiming the credit:

To claim the credit, employers will file two forms with their tax return. These are Form 8994, Credit for Paid Family and Medical Leave, and Form 3800, General Business Credit.


More Information:
Tax Reform Provisions that Affect Businesses

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Two education credits help taxpayers with college costs

With school back in session, parents and students should look into tax credits that can help with the cost of higher education. They do this by reducing the amount of tax someone owes on their tax return. If the credit reduces tax to less than zero, the taxpayer may get a refund.

Taxpayers who pay for higher education in 2019 can see these tax savings when they file their tax returns next year. If taxpayers, their spouses or their dependents take post-high school coursework, they may be eligible for a tax benefit.

There are two credits available to help taxpayers offset the costs of higher education. The American opportunity tax credit and the lifetime learning credit may reduce the amount of income tax owed. Taxpayers use Form 8863, Education Credits, to claim the credits.

To be eligible to claim the American opportunity tax credit, or the lifetime learning credit, a taxpayer or a dependent must have received a Form 1098-T from an eligible educational institution.

The American opportunity tax credit is:

  • Worth a maximum benefit up to $2,500 per eligible student.
  • Only for the first four years at an eligible college or vocational school.
  • For students pursuing a degree or other recognized education credential.
  • Partially refundable. This means if the credit brings the amount of tax owed to zero, 40 percent of any remaining amount of the credit, up to $1,000, is refundable.


The lifetime learning credit is:

  • Worth a maximum benefit up to $2,000 per tax return, per year, no matter how many students qualify.
  • Available for all years of postsecondary education and for courses to acquire or improve job skills.
  • Available for an unlimited number of tax years.

More information:

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Individuals with significant tax debt should act promptly to avoid revocation of passports

The Internal Revenue Service today urged taxpayers to resolve their significant tax debts to avoid putting their passports in jeopardy. They should contact the IRS now to avoid delays in their travel plans later.

Under the Fixing America’s Surface Transportation (FAST) Act, the IRS notifies the State Department (State) of taxpayers certified as owing a seriously delinquent tax debt, which is currently $52,000 or more. The law then requires State to deny their passport application or renewal. If a taxpayer currently has a valid passport, State may revoke the passport or limit a taxpayer’s ability to travel outside the United States.

When the IRS certifies a taxpayer to State as owing a seriously delinquent tax debt, the taxpayer receives a Notice CP508C from the IRS. The notice explains what steps the taxpayer needs to take to resolve the debt. IRS telephone assistors can help taxpayers resolve the debt. For example, they can help taxpayers set up a payment plan or make them aware of other payment options. Taxpayers should not delay because some resolutions take longer than others.

Don’t Delay!
It’s especially important for taxpayers with imminent travel plans who have had their passport applications denied by State to call the IRS promptly. The IRS can help taxpayers resolve their tax issues and expedite reversal of their certification to State. When expedited, the IRS can generally shorten the 30 days processing time by 14 to 21 days. For expedited reversal of their certification, taxpayers will need to inform the IRS that they have travel scheduled within 45 days or that they live abroad.

For expedited treatment, taxpayers must provide the following documents to the IRS: 

  • Proof of travel. This can be a flight itinerary, hotel reservation, cruise ticket, international car insurance or other document showing location and approximate date of travel or time-sensitive need for a passport.
  • Copy of letter from State denying their passport application or revoking their passport. State has sole authority to issue, limit, deny or revoke a passport.

The IRS may ask State to exercise its authority to revoke a taxpayer’s passport. For example, the IRS may recommend revocation if the IRS had reversed a taxpayer’s certification because of their promise to pay, and they failed to pay. The IRS may also ask State to revoke a passport if the taxpayer could use offshore activities or interests to resolve their debt but chooses not to.

Before contacting State about revoking a taxpayer’s passport, the IRS will send Letter 6152, Notice of Intent to Request U.S. Department of State Revoke Your Passport, to the taxpayer to let them know  what the IRS intends to do and give them another opportunity to resolve their debts . Taxpayers must call the IRS within 30 days from the date of the letter. Generally, the IRS will not recommend revoking a taxpayer’s passport if the taxpayer is making a good-faith attempt to resolve their tax debts.

Ways to Resolve Tax Issues
There are several ways taxpayers can avoid having the IRS notify State of their seriously delinquent tax debt. They include the following:

  • Paying the tax debt in full,
  • Paying the tax debt timely under an approved installment agreement,
  • Paying the tax debt timely under an accepted offer in compromise,
  • Paying the tax debt timely under the terms of a settlement agreement with the Department of Justice,
  • Having a pending collection due process appeal with a levy, or
  • Having collection suspended because a taxpayer has made an innocent spouse election or requested innocent spouse relief. 

Relief programs for unpaid taxes
Frequently, taxpayers qualify for one of several relief programs including the following:

  • Payment agreement. Taxpayers can ask for a payment plan with the IRS by filing Form 9465. Taxpayers can download this form from IRS.gov and mail it along with a tax return, bill or notice. Taxpayers who are eligible can use the Online Payment Agreement system to set up a monthly payment agreement. Using the Online Payment Agreement system is cheaper and can save time.
  • Offer in compromise. Some taxpayers may qualify for an offer in compromise, an agreement between a taxpayer and the IRS that settles the tax liability for less than the full amount owed. The IRS looks at the taxpayer’s income and assets to determine the taxpayer’s ability to pay. Taxpayers can use the Offer in Compromise Pre-Qualifier tool to help them determine whether they’re eligible for an offer in compromise.

Subject to change, the IRS also will not certify a taxpayer as owing a seriously delinquent tax debt or will reverse the certification for a taxpayer:

  • Who’s in bankruptcy,
  • Who’s identified by the IRS as a victim of tax-related identity theft,
  • Whose account the IRS has determined is currently not collectible due to hardship,
  • Who’s located within a federally declared disaster area,
  • Who has a request pending with the IRS for an installment agreement,
  • Who has a pending offer in compromise with the IRS, or
  • Who has an IRS accepted adjustment that will satisfy the debt in full.

For taxpayers serving in a combat zone who owe a seriously delinquent tax debt, the IRS postpones notifying the State Department of the delinquency and the taxpayer’s passport is not subject to denial during the time of service in a combat zone.

For more on denying, revoking passports because of tax debt visit IRS.gov

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National Association of Tax Professionals