Running a restaurant involves much more than just making sure good food is served properly to customers. Scheduling, marketing, ordering, payroll and so many more aspects are required by the management in order to be successful and operate efficiently.
One very important job is keeping an accurate record of tipped employees’ income for tax purposes. It can sometimes be a troublesome area to manage since tips are often cash-based and rely on the employee to report them.
In the restaurant and bar industry, tips are a significant portion of an employee’s income. According to a study of food and beverage server’s, tips can account for as much as 60% of an employee’s income.
Because of their significance, tips are taxable and evoke specific responsibilities for the employee to report tips and the employer to accurately factor tips and withholding amounts for payroll. The IRS requires that employees record and report any tipped income of $20 or more per month.
Here are some tips (pun intended) and suggestions for managing and paying tipped employees:
Collect a Tip Report
Every pay period (or week/shift), have your employees report their tips. There is no way that a manager can track all the tips collected by each employee for every shift. Instead, it should be stressed that each employee should accurately and honestly report their tips. Managers are, however, responsible for withholding income, Social Security and Medicare taxes on reported tips for their employees.
While there is no “right” way to manage tips, you can help make the process easier and clearer for your employees by creating a uniform and transparent policy. Depending on your establishment’s specific style, finding a policy that works for your employee’s is key.
Tracking tips by hand can lead to mistakes (costly ones), so instead take advantage of technology to make the task of tip tracking easier. Cloud-based POS systems allow each employee to accurately track the tip amount from each transaction and the system will automatically import the data to the restaurant’s accounting and payroll software.
Uncle Sam Knows
It may be a common thought among your employees that no one will know if they don’t report all of their tips. However, the IRS is well-aware that servers in tipping industries are notorious for underreporting. This can be a tough situation to get into because red flags are easily raised on your tax returns when the numbers don’t reflect reality. Facing an IRS audit (they audit servers more often than average taxpayers) can be a scary ordeal, especially without any answers to justify your taxes.
Financial Planning Down the Road
When an employee underreports their tips, the impact, in the long run, can hurt more than they realize. If their goal is to buy a car or home someday, they will need to borrow money from the bank, and one of the most significant determining factors is income.
By shaving off a small amount of money from what is supposed to be reported each shift can add up to a substantial amount of income over the course of a year. Sure that income isn’t taxed, but when it comes time to get approved for a loan, the amount may be less than expected.
Running a successful restaurant requires many moving parts to work efficiently and effectively. At times it can be very overwhelming but as a business grows, one key to success is always finding ways to do tasks better.
Glimpse provides a unique opportunity for restaurants and bars to capture more revenue by identifying areas of risk within their SOPs. We analyze randomly captured digital images that correspond to specific POS transactions to identify areas of risk regarding operations, service and behavior. To learn more about how Glimpse can help your restaurant or bar become more successful, visit https://www.glimpsecorp.com/contact/ today to schedule a free demo.