Have Employees Who Receive Tips? Here Are The Tax Implications
Many businesses in certain industries employ individuals who receive tips as part of their compensation. These businesses include restaurants, hotels and salons.
Tip definition
Tips are optional payments that customers make to employees who perform services. They can be cash or noncash. Cash tips include those received directly from customers, electronically paid tips distributed to employees by employers and tips received from other employees under tip-sharing arrangements. Generally, workers must report cash tips to their employers. Noncash tips are items of value other than cash. They may include tickets, passes or other items that customers give employees. Workers don’t have to report noncash tips to employers.
For tax purposes, four factors determine whether a payment qualifies as a tip:
- The customer voluntarily makes the payment,
- The customer has the unrestricted right to determine the amount,
- The payment isn’t negotiated with, or dictated by, employer policy, and
- The customer generally has the right to determine who receives the payment.
Tips can also be direct or indirect. A direct tip occurs when an employee receives it directly from a customer, even as part of a tip pool. Directly tipped employees include wait staff, bartenders and hairstylists. An indirect […]