Question: We have exempt employees who manage our catering division and sometimes get tips from customers. How do we declare tips for them?
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Answer from the experts at HR.BLR.com: “Tipped employees,” under the Fair Labor Standards Act, are those who customarily and regularly receive more than $30 per month in tips; their exemption status does not come into play in this determination. If the employees you reference receive tips only on an occasional basis, they may not meet this standard. More information is available from the Department of Labor.
For every month in which an employee (again, exempt or nonexempt) receives $20 or more in tips, the IRS requires the employee to report tip income on Form 4070, Employee’s Report of Tips to Employer (PDF), or on a similar statement. This report is due on the 10th day of the month after the month the tips are received. This statement must be signed by the employee and must show the following:
- The employee’s name, address, and SSN.
- Employer’s name and address.
- The month or period the report covers.
- The total tips received.
Employers must collect income tax, employee social security tax and employee Medicare tax on tips reported by employees. Employers can collect these taxes from an employee’s wages or from other funds he or she makes available.
Additionally, employers who operate large food or beverage establishments must file Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips (PDF) to report employee tip income. A large food or beverage establishment is defined as business where all of the following apply:
- Food or beverage is provided for consumption on the premises
- Tipping is a customary practice
- More than 10 employees, who work more than 80 hours, were normally employed on a typical business day during the preceding calendar year.
A worksheet for determining whether a business meets the criteria listed above is included in the Instructions for Form 8027 (PDF).
More information on the tax reporting of tips is available from the IRS.