Tuesday, June 26, 2012


The Internal Revenue Service just issued a new determination on tip reporting. This does not really have a big impact on salons and is more directed towards restaurants, but there is some good information that reminds us about tips.

In the revenue ruling, they state some background on tips. They list a lot of code sections, etc. but basically what it confirms is that tips received by an employee through the course of employment are considered remuneration for that employment and are deemed to have been paid by the employer for purposes of the employer’s portion of the FICA tax. Nothing new there. The remuneration is deemed to be paid when a written statement including the tips is furnished to the employer by the employee. Again, nothing new there and just a confirmation that as an employer you do not need to worry about the tips until the employee informs you. This is where the 4070A form comes in that you should be receiving on a monthly basis.

The ruling goes on and defines what a tip is. The ruling lists four factors that make a payment a tip:

  1. The payment must be made free from compulsion.
  2. The customer must have the unrestricted right to determine the amount.
  3. The payment should not be the subject of negotiation or dictated by the employer policy.
  4. Generally the customer has the right to determine who receives the payment.
This ruling was about restaurants that do an add on tip for parties of ten or more and that type of situation. In that type of situation, this is not considered a tip but rather wages and the employer does not have to get a statement from the employee regarding the tips.

Again, nothing new here but I thought you might be interested in a summary.