Nobody wants to pay more in taxes than they absolutely have to!
We’ve all had lunch with a friend who specifically leaves a cash tip so the server doesn’t have to document it. They can pocket it without paying income or FICA taxes, and their employer also doesn’t have to pay the FICA taxes.
While this seems like a nice gesture, is it worth the risk to the worker and the small business? Not at all.
At CSI Accounting & Payroll, we’ve worked with small business taxes for over 50 years. We’ve heard a lot of small business owners ask how much it matters if their employees aren’t reporting their tips. Let’s discuss:
- How does reporting cash tips benefit employees and employers?
- How does not reporting cash tips hurt employees and employers?
Benefits of Reporting Tips
Reporting your tips isn’t all bad! Here are some of the ways that it actually benefits workers and small businesses.
Employees Who Report Tips
When you report your cash tips, you’re building your credit toward Medicare and Social Security benefits in the future by paying your FICA taxes.
These are vital to being able to retire at the end of your career, and most people would agree that’s better than a few extra dollars in your pocket each pay period.
Employers Who Require Tip Reporting
When you make sure your employees are reporting their cash tips, you help keep the IRS out of everyone’s hair. This saves time, stress, and the overall integrity of your workplace culture.
Even better news – there’s a FICA tax credit for businesses. You get a tax credit for the Medicare and Social Security taxes you pay on food service industry tips.
Consequences of Not Reporting Tips
Don’t want to report your tips? Bad call. Here are some of the ways that it can come back to bite workers and small businesses.
Employees Who Don’t Report Tips
As a worker, if you don’t report your cash tips and pay the income and FICA taxes for them, you can get audited by the IRS. They can make you pay back taxes, plus charge you penalties and interest on tips that weren't reported.
Plus, if you’re found guilty of intentionally avoiding paying tax on tips, the IRS will dig further into your finances. It’s a huge headache that can be avoided by just reporting your cash tips.
The last big consequence that workers don’t consider is that not reporting your tips makes it look like you earn less money, therefore making it harder for you to make large purchases like a house.
Employers Who Don’t Require Tip Reporting
Just like the consequences for your employees, you can also face your own penalties for failing to withhold the right amount of FICA taxes – and you can be investigated further by the IRS if it’s found to be intentional.
The government has your tax history. If they think your workers likely made tips that weren’t reported, they can put you in the Allocated Tips Program.
This program makes you report a certain amount of estimated tips based on your sales, even if that wasn’t the actual amount received. You can end up paying more than you would have if you reported your tips in the first place.
Luckily, there’s a new program coming out that you can enroll in to help protect yourself from IRS scrutiny. SITCA will allow employers to leverage their POS software to find undeclared tips.
Note: Since SITCA is new, be sure to research and note any updates if you’re interested in enrolling.
Handle Cash Tips the Right Way!
Now that you know about the importance of reporting your cash tips, are you ready to check out payroll services?
If handling your business’s payroll operations is weighing you down, please consider CSI Accounting & Payroll! To see if we can be a good fit for your business, click the button below for a free consultation:
Not ready to talk? That’s okay! First, learn more about the cost of a payroll service by clicking the image below:
