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Home : Essentials of Payroll : Tips
TipsTipsTips are paid directly to employees by customers for services performed. Employees who receive tips must report them to the employer by the tenth day of the month after the month in which the tips were received, except when total tips for the month are less than $20. This information should be reported to the employer on Form 4070, "Employee's Report of Tips to Employer". The employer is required to withhold income, Social Security, and Medicare taxes from employee tips. These deductions are frequently made from employee base wages, rather than their tips, since employees do not usually contribute their tip income back to the employer so taxes can be withheld from it. If, by the tenth day of the following month there are insufficient employee funds from which to withhold the designated amount of taxes, the employer no longer has to collect it. If there are some employee funds on hand but not enough to cover all taxes to be withheld, then the withholdings should be first for Social Security and Medicare on all regular wages, then for federal income taxes on regular wages, next for Social Security and Medicare taxes on tips, and finally on income taxes for tips. Also, if the employer does not have enough reportable wages for an employee to withhold the full amount of required taxes, the employer must still provide the full amount of matching taxes. Example. Alice Mane is a waitress at the Bowers Cafe. In the past month, she reported $390 in tip income, while her employer paid $120 in base wages. The Bowers Cafe needs to deduct the following amounts from her total pay:
The employer finds that the total withholdings on both tip and wage income for Ms. Mane is $141.02. However, only $120 was paid out as wages, so the entire $120 must be deducted. The first types of taxes to be deducted from the $120 will be the Social Security and Medicare taxes on her regular pay, which total $9.18 and leave $110.82 available for other taxes. Next in line are the federal income taxes on her regular pay, which are for $24, leaving $86.82 available for other taxes. Next in order of priority are Social Security and Medicare taxes on her tip income, which total $29.84 and leave $56.98 available for the last deduction, which is the federal income tax withholding on her tip income. By allocating the remaining $56.98 to her federal income tax withholding, the company has paid off all her other taxes, leaving her responsible for $21.02 in unpaid federal income taxes. 123
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