Larry, I'd like your advice as to whether we're handling our tips the right way. We add 10% to the service charge and then we add that amount, after deductions, to our staff's checks. Is this the right way? William
William, it’s nice to hear from you. You have asked if the way you are handling your tips are correct. I understand that you are adding 10% to the charge as a tip, doing the deductions and putting the amount in the employee’s regular payroll. Although the way you are doing this really appears efficient and most likely would pass IRS muster should they audit you, technically you still need some additional documentation from your stylist.
The law is quite clear in that you do need to receive a Form 4070A the 10th day of the following month from the employees telling how many dollars in tips they received in the prior month. In your case, I think you could just have them report to you the tips they received that were not run through the cash register. If they do report any additional tips, then you would have to withhold based upon this additional amount.
Having the signed 4070A’s even though they put zero amounts, would protect you in case you had an auditor that was really following the law to the “T”. As I mentioned above, I think that what you are doing is probably more than most, but this additional step would help you to solve this problem. For more information on this you might go to: www.irs.gov and in the upper right hand corner, key in Publication 3138, which gives you a general overview. In addition to this there are publications 531 and publication 1244. The publication 1244 is a booklet that gives you the form 4070A that I discussed above.
If you do have any further questions, please feel free to contact me.
It’s a pleasure serving you.
Larry Kopsa CPA
William, it’s nice to hear from you. You have asked if the way you are handling your tips are correct. I understand that you are adding 10% to the charge as a tip, doing the deductions and putting the amount in the employee’s regular payroll. Although the way you are doing this really appears efficient and most likely would pass IRS muster should they audit you, technically you still need some additional documentation from your stylist.
The law is quite clear in that you do need to receive a Form 4070A the 10th day of the following month from the employees telling how many dollars in tips they received in the prior month. In your case, I think you could just have them report to you the tips they received that were not run through the cash register. If they do report any additional tips, then you would have to withhold based upon this additional amount.
Having the signed 4070A’s even though they put zero amounts, would protect you in case you had an auditor that was really following the law to the “T”. As I mentioned above, I think that what you are doing is probably more than most, but this additional step would help you to solve this problem. For more information on this you might go to: www.irs.gov and in the upper right hand corner, key in Publication 3138, which gives you a general overview. In addition to this there are publications 531 and publication 1244. The publication 1244 is a booklet that gives you the form 4070A that I discussed above.
If you do have any further questions, please feel free to contact me.
It’s a pleasure serving you.
Larry Kopsa CPA
