How Do Unreported Tips Affect Businesses Filing Taxes?

Posted on in IRS Issues

Cook County tax law attorney, unreported tips, businesses filing taxesThe service industry creates a significant portion of the United States economy. One estimation from 2012 indicated the economy as divided into 79.7 percent employed in the service industry, 19.2 percent employed the manufacturing sector, and 1.1 percent were employed in agriculture. Much of the service sector consists of tipped positions, such as a food server or a hair stylist.

Many owners of businesses offering professional services understand it is their responsibility to report and pay taxes on tips reported to them by their employees. There is also an amount of tips left unreported by employees. The business owner must also declare the income with social security and Medicare taxes.

Employee Responsibility

After the completion of a month, tipped employees must complete Form 4070, Employee’s Report of Tips to Employer, by the tenth day of the following month. Employees who make less than $20.00 in tips the previous month are exempt for that month. However, a non-exempt employee must complete and sign the form, and provide the following information:

  • Full name, address, and social security number;
  • The month or length of time the tips were earned; and
  • The total amount of tips received.

Employer Requirements

After receiving the form for the tips received, employers must withhold and pay the employee’s share of social security and Medicare taxes from those tips. The employer must also pay the employer share of those tips. For unreported tips, the Internal Revenue Service (IRS) will eventually issue a Section 3121q, Notice and Demand, announcing how much you owe for those unreported tips. Until this issuance, the employer is not responsible for holding and paying taxes for the unreported gratuity and is never responsible for paying the employee share, just the company share.

The amount requested is based on these forms:

  • Tip audits;
  • Data form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips; or
  • Form 3147, Social Security and Medicare Tax on Unreported Income. 

Food and Beverage Establishments 

Tips are expected and most common if a company is a large food and beverage establishment—any restaurant establishment employing a minimum of 10 employees on the majority of business days throughout the tax year. These companies must complete a Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips.

Get Your Questions Answered 

Owning and operating a business is difficult and time-consuming. Many owners do not have a lot of spare time and fitting in the time to file taxes is often a challenging accomplishment. When tax questions arise, research time is limited and important questions are therefore left unanswered. Guessing the information on taxes is never advisable. An incorrect guess can result in severe repercussions.

If you are interested in discussing your tax questions with a Cook County, IL tax law attorney, contact the Law Offices of Eric G. Zelazny today by calling 708-888-2299 to schedule your free initial consultation.

Sources:

https://www.irs.gov/help-resources/tools-faqs/faqs-for-individuals/frequently-asked-tax-questions-answers/small-business-self-employed-other-business/form-w-2-fica-medicare-tips-employee-benefits/form-w-2-fica-medicare-tips-employee-benefits

https://www.irs.gov/businesses/small-businesses-self-employed/reporting-tip-income-restaurant-tax-tips

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