If you own a restaurant, a bar, or any other small business where employees earn tips from customers, you have the added responsibility of withholding taxes from your employees’ paycheck based on the tips they receive. There are special tax requirements for tips because they are often paid in cash.
Per IRS guidelines, your employees are required to report to you the dollar amount of cash tips they receive each month by the 10th of the following month (ideally, you’ll have credit card tip numbers in your accounting system already). And, as long as they earn more than $20 in tips a month, you are required to take out withholding taxes.
If calculating withholding taxes on tips sounds complicated to you, don’t worry: We’ve designed a calculator specifically to tackle tip tax.
All you have to do is enter your employees’ gross wages, their W-4 withholding information, and the cash and credit card tips they’ve earned into the calculator, and it will tell you what the resulting withholding tax and net pay should be.
Forgetting or neglecting to report cash tips doesn’t relieve your employee of the responsibility of paying taxes on them. Since tax evasion probably isn’t on anyone’s mind, keeping tax reporting on tips as easy as possible is a win-win for everyone so you can withhold the right amount of taxes from their hourly or salaried base wages. To keep things simple for you as the business owner, we recommend using a tax tip calculator like this one to make sure you’ve got your withholdings correctly calculated. You can also find restaurant payroll software that makes it easier to automate the process, including submitting all tax filings.