Tip reporting

According to the IRS, servers are mandated to declare their tips by using Form 4070A (

http://www.irs.gov/pub/irs-pdf/p1244.pdf).  On that form, employees are expected to declare 100% of the tips they earn so that FICA and other taxes may be collected.  The employer is compelled to make this form available to their employees.  If they are not declared, no income is reported.  Great news, right?

Not really.  The employer is responsible for their share of these same tips.  If they are not declared, no tips are due.  However, if the IRS performs an audit -- which they do very frequently -- and deem that you did not report the actual amount of tips (or even an acceptable amount), they may deem that you under-reported.  As a result, the IRS is entitled to assess you for the unreported tip amount and most likely interest as well as penalties.  If this seems like a small risk to take, imagine the downside.  By being the subject of an audit, you are now on their radar screen, subjecting you for future audits down the road.  In addition to the what they find during the course of the audit, there is a lot of time and expense investment that must take place.  Time spent defending yourself (even if you are innocent) as well the cost to retain an attorney, CPA or EA who will come at a considerable cost to defend you in front of the service.  Oh yeah, you will also owe the amount of the under-reported tips.  Not worth it!


With each payroll, the employer should collect each employee's sales and tips declared for inclusion in the payroll reporting.  At the end of each year, the employer must file IRS Form 8027.  This document outlines the employer/restaurants' sales, charged sales, charged tips as well as the total reported tips.  More information can be found on the IRS' website (http://www.irs.gov/pub/irs-pdf/i8027.pdf).

You cannot force your employees to report all their tip income; however, you can monitor their tips they declare. A good way to do this is to separate out the credit card tips from their cash tips. If the variance is small, less than 2 percentage points from each other, you might be okay. However, if the variance is larger, not all cash tips might have been declared.

The best way to nip this potential issue early on is to educate your staff. Borrowing from the TRAC (Tip Reporting Alternative Commitment) agreement, the employer should:

• Educate its employees around tip reporting and their obligations.
• Set up tip reporting procedures so employees know how (and when) to declare their tips.
• Ensure all taxes are paid timely

The National Restaurant Association has some great resources on this topic and would like to help to make sure you don't find yourself on the wrong end of an IRS inquiry.

Disclaimer: Any tax advice contained in this communication, unless expressly stated otherwise, is not intended to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties that may be imposed on the taxpayer under the Internal Revenue Code or applicable state or local tax law or (ii) promoting, marketing, or recommending to another party any tax-related matters addressed herein.

Michael Viola, CPA, MBA, is the president and founder of PURE Restaurant Solutions, an accounting firm that specializes in restaurant accounting. PURE is located in Orange County, California, but with the help of cloud computing, PURE's clients are nationwide. With nearly 14 years of service in the industry, he has worked with some of the leading restaurant concepts as an employee, auditor (through his "Big 4" audit clients) or as a Controller/CFO. Michael is passionate about restaurants and enjoys seeing concepts succeed. He can be contacted at blog [at] go-pure.com.