As a small restaurant owner, I have questions about the
tip-sharing program I have for my employees. My managers and assistant managers
are not included in the program, and we only accept cash tips, no credit cards.
Are there rules that dictate when the employer must oversee and keep records of
the tip process and report tip wages to the IRS? Do I have any responsibility
to educate my employees about their reporting requirements?
– Brian in San Jose
Two key obligations arise with a tip-sharing program. First,
employers must comply with Labor Code and labor commissioner rules regarding
tip-sharing plans. California imposes three main requirements for these
programs to be valid: 1) pool participants can be only those employees who contribute
in the chain of service the customer receives, per industry custom; 2) the
employer, managers, and supervisors cannot share in the tips; and 3) there must be some reasonable relationship between
the tip distribution and the degree of service provided by the employee. It is
a good idea to put your tip-sharing policy in writing so that all employees
know what to expect. See the August 2006 issue of CWHA for
more on tip sharing.
Second, federal and state tax obligations come into play.
Employees who collect at least $20 per month in tips must report tips to you in
writing at least monthly, on or before the 10th day of the month following the month
the tips were received. You must keep records so you can withhold FICA and
other required taxes. The rules are complex and, depending on the
circumstances, you may have to report the tips to the IRS and state
authorities, provide employees with certain notices, and have a signed
agreement with employees about the tip program. In any event, notify employees
of their reporting obligations.
The HR Management & Compliance Report: How To Comply with California Wage & Hour Law,
explains everything you need to know to stay in compliance with the
state’s complex and ever-changing rules, laws, and regulations in this
area. Coverage on bonuses, meal and rest breaks, overtime, alternative
workweeks, final paychecks, and more.
For more information,
including details on special tip-reporting programs that can reduce your
administrative burden, go to the IRS website at www.irs.gov/faqs/faq12-3.html
and the California Employment Development Department website at
www.edd.ca.gov/taxrep/de231e.pdf.