Read the latest from Kickfin

It’s no secret that tax season is confusing and stressful, especially when you work in the hospitality industry. Many restaurant employees — whether they’re newbies or seasoned pros — aren’t exactly sure what’s required when it comes to reporting their income and filing taxes. There tends to be a lot of misconceptions particularly when it comes to reporting on tips received.

Maybe your employees are asking questions, or maybe you have a hunch that they should be asking questions. If that’s the case, we’ve taken the liberty of answering a few FAQs that your staff might find helpful. (Obligatory disclaimer: Of course, this is not intended to be tax, legal or accounting advice, and it’s always best to point them in the direction of a certified tax pro if they need help!). 

1. Do I have to report my tips to the IRS? 

Short answer: yes. 

Employees are required to report all income, including tips received while working at a restaurant, on their tax returns. This includes cash tips, credit card tips, and tips received via electronic payment platforms. 

Accurately reporting your income, including the tips you’ve earned, ensures that you avoid penalties and legal issues. But it’s not just about ensuring “Uncle Sam” gets his due; it also behooves you to avoid underreporting your earnings. More on that in a minute…

To make things easier, it’s advisable to keep detailed records of your tips to ensure accurate reporting come tax time. (If you’re a Kickfin user, of course, that’s easy to do!)

These days, you probably receive tips from customers in one of two ways: either they add a tip via credit card when they pay the bill, or they’ll leave a cash tip. Here’s what to know about reporting credit card tips and cash tips to the IRS

Reporting credit card tips

Most restaurants use POS systems to run their front-of-house operations. When customers leave tips on credit cards, they’re getting tracked in the POS and reported to the IRS by your employer. As a result, those tips are going to be included on the W-2 or 1099 that your employer gives you.

That’s because your employer is responsible for paying taxes on your tip earnings, too. In addition to paying payroll taxes, employers are required to withhold income taxes, Social Security taxes, and Medicare taxes on those employee tips, just as they would on other forms of employee compensation. They must keep accurate records of all tips reported by employees and include those amounts when filing employment tax returns.

(Keep in mind: this is the case for all tips left on credit cards, no matter how your employer is paying out those tips — cash, digitally, paycard or payroll. In other words, even if you’re leaving your shift with a wad of cash in your wallet, the IRS is well aware that you earned those tips, assuming your customers are primarily paying with credit cards.)

What’s more: because cash tips are less common and POS data is readily available, the IRS collects income information based on the credit card tips you input through their SITCA program. So, there’s really no way around reporting credit card tips to the IRS, and you’ll be liable for income tax on those tips. 

>> Learn more about SITCA and tip reporting

Reporting cash tips

This is where things can get a little muddy. 

It’s been common practice in the restaurant industry to under-report cash tips (or not report them at all). Technically, this is illegal. 

Bottom line: Employees are required to report all tips received when you file your taxes, including cash tips that were not run through your restaurant’s POS. Again, if you don’t accurately report your tip earnings, you could face financial and/or legal penalties. 

2. Does it affect my employer (and will they care?) if I under report my cash tips? 

Most restaurants are using the tip credit to decrease their monthly labor costs — so under reported tips could cause them some problems. 

Your employer’s biggest concern here is making sure that you earn at least minimum wage with the addition of your tips. If the majority of your tips are coming from credit cards, those are already automatically reported through your POS system, and your employer can track them for compliance purposes. But if you’re the rare server who earns more cash these days, then under reporting tips could cause a big spike in labor costs for your employer. 

In short, your employer probably won’t care if you don’t report all of your cash tips, but there are some serious reasons why you should…

3. What happens to me if I under report my cash tips? 

Leaving those cash tips untaxed might give you more freedom in the short run, but it could affect your future financial security. 

1. You run the risk of being audited. No, it’s not super likely, but there’s always a chance that the IRS may be suspicious of your reported sales compared to your reported tips. This discrepancy could cost you in the long run.
   
   
2. Unemployment and disability payments are based on wages. If you’re under-reporting your tips, it could hurt you if you ever need to rely on unemployment or disability (which many restaurant employees had to do during the pandemic). With your income artificially decreased, you’ll have to live off of much less than you’re actually owed.
   
   
3. It may be harder to make investments in your future. We know great servers who are raking in the cash… but when you’re ready to make a major financial move, you might not have the documentation to back it up. For example, you might love a house that is technically in your budget, but without proof of your entire income, you might not qualify for a sizable enough home loan or be able to prove that you make three times the rent.

4. How does my tip reporting affect my taxes? 

Ultimately, how much you report in tips will determine how much you owe in taxes — that’s kind of the whole point of reporting your income. The more you report, the higher your tax liability. 

5. Why do I owe taxes every year? Aren’t they supposed to be withheld from my pay? 

They are — but your hourly wage probably isn’t enough to cover your entire tax responsibilities. You might remember picking up several $0 paychecks throughout the year. 

This isn’t necessarily a bad thing: many financial experts say that it’s actually better to owe taxes when you file. That means you had more freedom to invest throughout the year, and that you weren’t offering the government a loan that they have to pay back in April. 

But we get it. That big tax refund is way more fun to see hit your bank account, and you might not be prepared to pay up if you owe. If you’re afraid that you’ll owe taxes (or panicking about where you’re going to get the money to pay them), here’s what you can do to ease your burden. 

• Set taxes aside each week. Even though you’re walking out with tips in hand (or in your bank account), that doesn’t mean they aren’t going to be taxed eventually. Each week, count up your tips and set 10-15% aside to save for tax season. If you have extra money leftover — take a vacation!
  
  

• Explore write offs and deductions. Did you pay for your own uniform? Or for a safe alcohol service course? Are credit card fees taken out of your tips? All of these are deductions that you can use to reduce how much you owe.
  
  

• Keep precise records. You’ll need to know how much you spent on work-related expenses and will need to back it up with documentation. If your employer is using Kickfin, your account is a great source of truth for all of your tip payout information. 

All of this reporting and recordkeeping can feel overwhelming — especially for servers who can’t remember how much cash they left with last night, let alone a year ago. Make sure your employees have all the tools they need to make smart financial decisions. Check out how Kickfin’s reporting can make life easier for managers and servers alike.

Like any good business owner, restaurant operators are always looking for ways to reduce overhead costs and bump up profits. And one way to cut costs without sacrificing quality is to relieve some of your tax burden using the credits available to food and beverage businesses. 

One that you need to know: the FICA tip credit. Thanks to America’s tipping culture, most servers earn the majority of wages from tips paid directly from customers, and the IRS is willing to acknowledge that. 

Here’s everything you need to know about the FICA tip credit for restaurant operators. (Obligatory disclaimer: this is not intended to be legal or financial advice — always consult with your legal counsel or tax professional if you have questions!)

What is the FICA tip credit? 

You’ve heard of the tip credit — here’s another “credit” that restaurant owners can use to decrease costs. 

FICA taxes are your payroll taxes that go towards federal programs, like Social Security and Medicare. The liability for FICA taxes is shared between the employee and employer. 

But technically, aren’t customers the one paying servers’ wages through their tips? Should all of the tipped income tax liability fall on the restaurant owner? 

According to the federal government, the answer is no. You can take a tax credit to decrease your burden on employee payroll taxes based on the amount of tips that your employees report above minimum wage. This is called the FICA tip credit, which is part of the general business tax credit. 

When is the FICA tip credit applicable? 

There are some important conditions that restaurant operators must comply with in order to qualify for the FICA tax credit. 

• You must own a food and beverage business where tipping is customary 
• Tips must be given voluntarily (so service charges do not count toward tips, even if they’re paid directly to employees)
• You must owe taxes in order to qualify 
• The FICA tax credit cannot reduce your tax liability below $0
• You cannot claim the FICA tax credit and deduct those same taxes as a business expense

How to calculate the FICA tip credit 

Here’s an example of how to calculate the FICA tip credit for a tipped employee. 

Before we get started on the math, note that the FICA tip credit is based on a minimum wage of $5.15 per hour (the minimum wage when the credit was established). Employers are allowed to take the tax credit on any tips that a server earns above the $5.15 minimum wage.

So, let’s say:

Your server works 100 hours over the course of a month. During that time, the server also earned $1000 in tips. You’re taking the tip credit and paying $2.13 an hour for her time.

100 hours x $5.15 minimum wage = $515 required minimum wage for FICA tax credit

100 hours x $2.13 hourly wage = $213 actual wages paid 

$515 minimum wage – $213 actual wage = $302 ineligible FICA tax credit amount 

$1000 in tips – $302 ineligible credit amount = $698 eligible FICA tax credit amount

$698 eligible credit x 7.65% FICA tax rate = $53.40 FICA tax credit

If your restaurant already pays more than the required minimum wage of $5.15 per hour, then you can simply take the FICA tax credit on any tips earned outside of their hourly wages. 

For example, your server works 100 hours in a month and earns $1000 in tips. You pay her $7.25 in hourly wages. 

$1000 eligible credit amount x 7.65% FICA tax rate = $76.50 FICA tax credit

Obligatory disclaimer: While we’re here to provide information and tips, remember to always consult with an expert when you’re preparing your taxes so that you can get advice personalized for your business. 

Make life easier with Kickfin’s tip management platform

We know that’s a lot of math, but with powerful reporting tools, the tip management process is a whole lot smoother for everyone involved. 

For better, easier tip tracking and reporting that will simplify tax season, check out Kickfin’s tip management platform. Our solution streamlines tip reporting as well as digital tip payouts and tip pool calculations. Request a demo to learn more.

Tipping is as American as apple pie — so much so that it has become heavily regulated.  

Here’s one tipping regulation that most restaurant owners can cheer for: the tip credit. Find out about the federal laws that allow employers to subsidize labor costs through tipped earnings. (Obligatory disclaimer: this is not intended to be legal or financial advice — always consult with your legal counsel or tax professional if you have questions!)

What is the tip credit? 

There’s a federal minimum wage of $7.25 an hour, but many restaurants only pay their servers $2.13. How? 

Since servers and bartenders earn the majority of their living from tips, the U.S. Department of Labor created the “tip credit,” which allows employers to count tipped earnings toward their minimum wage requirements. 

Under the Fair Labor Standards Act (FLSA), the federal minimum wage is set at $7.25 per hour, but employers can take a credit of up to $5.12 per hour. (Importantly, this number varies by state — more on that later). 

If you take the tip credit, you’ll ensure that servers earn at least $7.25 an hour in wages and tips (hopefully much more!), and take the tip credit when it’s time to run payroll. 

“Taking” the tip credit: Is it fair to employees? 

As most restaurant pros know all too well, this industry is known for its tight margins. That’s why a tip-friendly culture can be beneficial to both hospitality employers and employees. Tipping frequently enables hardworking, well-deserving employees to earn far more than minimum wage requirements — and far more than what revenue constraints allow operators to pay their people. (In fact, many full-service restaurant servers earn $20 or more per hour.)

In states where the tip credit is allowed, and in restaurants where tipping volumes are sufficient, the tip credit allows restaurant owners to reduce some of their labor costs, while ensuring their staff still make at least a living wage.

Which states allow you to take the tip credit? 

Based on your location, taking the tip credit may not be an option for you. Make sure you know the legality in your state and how it will affect your recruiting efforts. 

States that allow the tip credit

If you live in any of the following states, you’re in luck! As of publication, these are the states that allow some form of the tip credit.

• Alabama
• Arizona
• Arkansas
• Colorado
• Connecticut
• Delaware
• District of Columbia
• Florida
• Georgia
• Hawaii
• Idaho
• Illinois
• Indiana
• Iowa
• Kansas
• Kentucky
• Louisiana
• Maine
• Maryland
• Massachusetts
• Michigan
• Mississippi
• Missouri
• Nebraska
• New Hampshire
• New Jersey
• New Mexico
• New York
• North Carolina
• North Dakota
• Ohio
• Oklahoma
• Pennsylvania
• Rhode Island
• South Carolina
• South Dakota
• Tennessee
• Texas
• Utah
• Vermont
• Virginia
• West Virginia
• Wisconsin
• Wyoming

While all of these states allow a tip credit, check your state laws to see how much you can take per hour. In states with higher minimum wage requirements, you may see higher tip credit amounts — and other states that lower the maximum tip credit amount. 

States that ban the tip credit

At the time of publication, these states do not allow employers to take the tip credit for their FOH staff, meaning all employees must be paid at least the state minimum wage.

• Alaska
• California 
• Minnesota
• Montana
• Nevada 
• Oregan
• Washington 

Which employees does the tip credit apply to? 

Big picture: In states where you can take the tip credit, it applies only to tipped employees. That means your untipped employees — i.e., your back-of-house staff — are not eligible for a tip credit. 

But of course, we’re talking about the law here, so exceptions and caveats abound! Even if it’s allowed in your state, there are still some boxes you have to check before taking the tip credit on all of your tipped employees. 

To determine which employees qualify for the tip credit, here are a few questions you need to ask. 

• Is the tip credit allowed in my state? Again, a handful of states do not allow employers to take the federal tip credit, period.
• How much do my employees earn in tips? You can only take the tip credit for tipped employees who regularly earn at least $30 a month in tips. 
• How much time are my tipped employees spending on non-tip-producing duties?  

This one is a little tricky. Basically, the tip credit can only be applied to the hours your tipped employees spend doing work that produces tips OR that directly supports tip-producing work, a.k.a. side work. (Per the DOL, supporting tasks include “dining room prep work, such as refilling salt and pepper shakers and ketchup bottles, rolling silverware, folding napkins, and setting tables”).

However: Employers lose the tip credit for the time their tipped employees spend doing side work if that side work exceeds 20% of their workweek. (This is known as the 80/20 rule.)

Additionally, employers lose the tip credit for the time their employees spend doing side work if they’re doing side work for more than 30 consecutive minutes. In other words, even if an employee spends less than 20% of their total workweek doing side work, the tip credit doesn’t apply to any periods of time where the employee spent 30 consecutive minutes or more on side work. 

Suffice it to say, this can get really complicated, really fast. Understanding the rules themselves is only half the battle; being able to track and apply them can be a challenge, too.

If you’re confused (or even if you think you’ve got it down pat) — it’s a good idea to consult with legal counsel to ensure you’re operating above board.

Can I take the tip credit if I implement a tip pool?

Tip pooling, like the tip credit, is pretty heavily regulated at both the federal and state levels. And just like taking the tip credit, it can be easy to be unintentionally out of compliance when it comes to tip pooling. 

So what happens if you run a tip pool and you want to take the tip credit (or vice versa)?

There are two key things to note.

• Implementing a tip pool doesn’t preclude you from taking the tip credit.
• However, if you want to take the tip credit, your tip pool cannot include back-of-house (i.e. non-tipped) employees.

In other words: if you’re taking the tip credit, only tipped employees can participate in tip pooing or tip sharing. If BOH employees get tipped out — which is legal in many places — then you can’t take the tip credit for any of your employees, including your FOH folks. 

Do I have to notify my employees about the tip credit?

You are required to give your employees notice at the time they’re hired that you’re taking the tip  credit.

What is the FICA tip credit?

This is another huge opportunity for employers to increase profit margins without cutting costs on food or labor. Typically, employers are required to pay a share of their employees’ Social Security and Medicare taxes (also known as FICA) based on their income. The program was designed to incentivize employers to better monitor staff tip reporting. 

Since many servers and bartenders increase their wages to well over minimum wage in tips, the FICA tip credit allows restaurant owners to decrease their tax liability. Rather than determining their FICA tax liability by total income (including tips), this tax credit allows employers to only pay FICA taxes on employee earnings that are above minimum wage. 

Simplify tipping for your team 

If you have tipped employees, you have to deal with a lot of cash. It’s taking up managers’ time and creating a reporting nightmare. Move into the future with Kickfin — the easiest way to pay out tips. Kickfin’s capabilities digitize tip payouts, simplify tip pool calculations, and makes reporting a breeze. 

Learn more about Kickfin today.