As the business owner or manager, you must collect the tip information from the staff each pay period. You may use the IRS created Form 4070A “Employee’s Daily Record of Tips” (http://www.irs.gov/pub/irs-pdf/p1244.pdf) or use any other form you like so long as it includes:
- Employee’s name, address and SS number
- Employer’s Name
- Period Covered and Date Reported
- Total Amount of Tips Received by the Employee, and the
- Employee’s Signature
2. You also need to be sure that you are withholding income tax and FICA tax from each pay period, and report each employee’s tips to the IRS. Assuming that you use a payroll service to process your payroll, you will need to report the total tips reported for the payroll period as submitted to you by that employee, along with the tipped employee’s hours and hourly rate. This information will also be included on your “Employers Quarterly Payroll Tax Return” (Form 941) that is filed by you or your payroll service. At the end of the year you will also need to account for each employees total wages (including tips) on their W2. In certain cases you may need to “allocate” additional wages for an employee if he or she has failed to report “sufficient” tip income (more on this in the next section)
As a practical matter you cannot force your employees to report all their tip income, and be assured, they will not! While you are legally responsible for distributing Form 4070A (or an acceptable alternative) the restaurant is only liable for its share of the FICA taxes on unreported tips (and only if the IRS is successful at substantiating unreported tip income). While that may sound to you like an acceptable risk to take, just think of the liability that might accrue over a year or more if such an audit were to take place. Many restaurants would be out of business! You simply should not take that risk. You must therefore take a pro-active role in educating, prodding, cajoling, and annoying, if necessary, your employees to get them to accurately report their tips.
3. You need to file IRS Form 8027 at the end of each year. It summarizes the restaurants total sales, charged sales, charged tips and total reported tips. So long as tipping is customary in your restaurant, food and beverages are served, and more than ten employees are normally employed, then you must submit the “Employers Annual Information Return of Tip Income and Allocated Tips” on an annual basis (http://www.irs.gov/pub/irs-pdf/f8027.pdf).