Small Business, Self-Employed, Other Business > Form W–2, FICA, Medicare, Tips, Employee Benefits

Previous Page | Table of Contents | Next Page Right Arrow

Frequently Asked Tax Questions

Small Business, Self-Employed, Other Business - Form W–2, FICA, Medicare, Tips, Employee Benefits

As an employer, do I have any liability for social security and Medicare taxes if my employees receive tips but don't report them to me?
If the reported tips from employees of a large food and beverage establishment are 8% or more of sales, must an employer still allocate tips to the employees?
When an employer provides dependent care assistance, should the employer's contribution be reported in box 10 of Form W-2?

Rev. date: 12/21/2012

Allocated Tips

Employee's Daily Record of Tips and Report to Employer

Employment Tax

Income, Tip

Reporting Tip Income

Tips on Tips - A Guide to Tip Income Reporting for Employees Who Receive Tip Income

Tips on Tips - A Guide to Tip Income Reporting for Employees Who Receive Tip Income (Spanish version)

Employers in industries where tipping is common know that they must report and pay taxes on tips employees report to them. However, many employers do not realize that they are liable for the employer share of social security and Medicare taxes on tips employees do not report to them. The employer’s liability for taxes on unreported tips does not arise until the Service issues a Section 3121(q) Notice and Demand.

You, as an employer, must withhold and pay the employee share of social security and Medicare taxes on tips your employee reports to you to the extent the employee’s non-tip wages or funds the employee provides you are available. You must also pay the employer share of social security and Medicare taxes on all reported tips.
Tipped employees are required to report their tips to their employers by the 10th of the following month if they receive cash tips of $20 or more in the month. Cash tips include tips they receive directly from customers, charged tips (e.g., credit and debit card charges) you distribute to them, and tips they receive from other employees under any tip-sharing arrangement. Thus, both directly and indirectly tipped employees must report tips received to their employer.
For unreported tips, your liability for the employer share of social security and Medicare taxes does not arise until the Service issues you a Section 3121(q) Notice and Demand. The tax due shown on the notice and demand may be based on tip audits, data from Form 8027 (PDF), Employer’s Annual Information Return of Tip Income and Allocated Tips, or Forms 4137 (PDF), Social Security and Medicare Tax on Unreported Tip Income. The employer is not liable to withhold and pay the employee share of social security and Medicare taxes on unreported tips.
You must file Form 8027 if you operate a large food or beverage establishment (more than 10 employees work more than 80 hours on a typical day, tipping is customary, and food or beverages are consumed on the premises). You may also be required to allocate tips if the total tips reported to you are less than 8% of gross receipts. Report the allocated amount on the employee’s Form W-2 (PDF).
Form 4137 is used by employees to report and pay their share of social security and Medicare taxes on tips they did not report to you. This should include any tips allocated to employees of large food and beverage establishments. Unless an employee has a daily tip record or other credible evidence that shows that the employee did not receive the allocated tips shown on Form W-2, the employee must report the allocated tip amount on Form 4137.

Additional Information

Publication 15 (PDF), (Circular E), Employer's Tax Guide Instructions for Form 8027 (PDF), Employer's Annual Information Return of Tip Income and Allocated Tips Tax Topic 761, Tips - Withholding & Reporting Publication 1244 (PDF), Employee's Daily Record of Tips and Report to Employer Publication 531, Reporting Tip Income Revenue Ruling 2012-18, 2012-26 I.R.B.

Rev. date: 12/21/2012

Allocated Tips

Income, Tip

No.

Tip allocation is only required when the amount of tips reported by employees of a large food or beverage establishment is less than 8% (or an approved lower rate) of the gross receipts (other than nonallocable receipts) for the given period.
If the employees are reporting 8% or more, there would be no allocated tip amount.
The employer must still file Form 8027 (PDF), Employer's Annual Information Return of Tip Income and Allocated Tips.
The employer is also still required to withhold and pay taxes with regard to all reported tips.

Additional Information

Publication 1239 (PDF), Specifications for Filing Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips, Electronically Publication 1244 (PDF), Employee's Daily Record of Tips and Report to Employer Publication 15, (Circular E), Employer's Tax Guide Instructions for Form 8027 (PDF), Employer's Annual Information Return of Tip Income and Allocated Tips Publication 531, Reporting Tip Income

Rev. date: 12/21/2012

Dependent Care Assistance

Wage and Tax Statement (Info Copy Only)

Yes.

Report the value of all dependent care assistance you provide to an employee under a dependent care assistance program in box 10 of the employee's Form W-2 (PDF).
Include any amounts you cannot exclude from the employee's wages in boxes 1, 3, and 5.

Additional Information

Publication 535, Business Expenses Publication 15-B (PDF), Employer's Tax Guide to Fringe Benefits

Previous Page | Table of Contents | Top of Page | Next Page Right Arrow

Frequently Asked Tax Questions

Small Business, Self-Employed, Other Business - Form W–2, FICA, Medicare, Tips, Employee Benefits

As an employer, do I have any liability for social security and Medicare taxes if my employees receive tips but don't report them to me?

If the reported tips from employees of a large food and beverage establishment are 8% or more of sales, must an employer still allocate tips to the employees?

When an employer provides dependent care assistance, should the employer's contribution be reported in box 10 of Form W-2?