Thanks,
Olivia
Olivia, as Jack Nicholson’s character Colonel Nathan Jessep said in the movie A Few Good Men, “you don’t want to know the truth.”
All tips are considered income and an employee is required to report their tips to the employer in writing (there is an IRS form 4070A that you can use). There is no 50% rule and in the salon industry (there is a percent that you can use in the restaurant industry) there is no set percent. The tips are considered additional wages paid by the employer to the employee even though the employee received the monies. The employer is to withhold from the employee based on the tips and is required to match the required payroll taxes.
The good news is that the employees need to voluntarily report the tips to you and if they under report you do not have an issue unless the IRS audits the tips and determines that the employees did not report all of their tips. At that time you would owe the additional tax but no interest and penalty. You would need to have the form 4070A or a similar signed document on file. The employee would have a bigger problem because they would owe 7.65% social security plus income tax and interest and penalty. In effect, they would be committing tax fraud by not reporting all of their income.
There is the truth.
Let me know if you have any further questions. It is a pleasure serving you.
Larry Kopsa CPA
