REPORTING TIPS

Larry, I work for a salon and the owner won’ t let us report out tips. I attended one of your classes and I showed her the information but she says that she does not want to report tips. I really want to do my personal return correctly. I have over $6,000 in tips that I received this last year. There are 10 of us in the salon and most of us think like me. What can I do?

Sally

Sally, good for you. I am always impressed when I meet someone that is trying to follow the rules. It is easy for you to report your tips. There is a Form 4137 that you can fill out. Here is a link.

http://www.irs.gov/pub/irs-pdf/f4137.pdf

For your information, your employer may get an unpleasant surprise. The IRS is launching a new campaign to collect unpaid FICA tax on tips. It is sending out bills to employers for their share of FICA tax on unreported tips, using data collected from Forms 4137. The IRS will send letters to these firms telling them how much they owe and instructing them to include that amount with their next scheduled payroll tax deposit. Those that do so will be exempt from any interest or penalty on the back taxes. As you can see by the form, the employer's information is on the Form 4137.

Best of luck.

Larry Kopsa CPA

TIP REPORTING IS STILL EASIER FOR RESTAURANTS

Here is what the food industry gets to do to report tips. Not for the salons and spas. Maybe someday Congress will pass legislation to give us equal footing.

IRS Extends Food Industry Tip Reporting Program

WASHINGTON — The Internal Revenue Service today extended for an additional two years its program that simplifies the record keeping burden for reporting tip income in the food and beverage industry.

The Attributed Tip Income Program (ATIP) was first announced in 2006 in Revenue Procedure 2006-30. The program, which was originally set to expire Dec. 31, 2009, has been extended to Dec. 31, 2011, under Revenue Procedure 2009-53 issued today.

Employers who participate in ATIP report the tip income of employees based on a formula that uses a percentage of gross receipts, which are generally allocated among employees based on the practices of the restaurant.

Both employees and employers benefit from participation in the ATIP program. The IRS will not initiate a tip examination during the period the employer and employee participate in ATIP. Participating employees do not have to keep a daily tip log or other tip records.

Enrollment is simple. Employers elect participation in ATIP by checking the designated box on Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips. Employees who work for a participating employer can easily elect to participate in ATIP by signing an agreement with their employer to have their tip income computed under the program and reported as wages.

QUESTION ON CHARGED TIPS

My employees make 50% commission. For 5 service providers, they were tipped $200.00 on credit cards yesterday. Do you have any discussion on your blog as to whether or not I can legally charge them a fee for charged tips. I am thinking of going to no charged tips if I cannot pass a small fee on to them.

Thanks,
Paula

Paula, thank you for your question. Tips and credit card fee’s are a sticky situation for salon owners and I understand your frustration. I have posted many articles on our blog regarding this issue.

To answer your question: unfortunately you cannot charge the employees for the tips that are run through the credit card machine. This is a business expense of the owner and there is no way around this unless you go to no tipping with credit cards.

I hope this helps and best of luck!

Larry Kopsa CPA

CREDIT CARD SERVICE DEDUCTION ON TIPS

Dear Larry, first of all, I wanted to thank you for your information that you make available online. I came across your Blog this morning and have found it to be great information. I have a question regarding the tip situation. As you are aware there are many topics on this subject matter. I ran across information that says you can and can't deduct on credit card service fee from tips. I also ran across an article that mentioned you can simply add a gratuity charge to the overall service ticket much like a service charge, and then deduct your % first before giving remainder to the staff their gratuity. Since our industry has not qualified us for the tip tax credit and I know we have been battling it for a decade or more, what is the best way to handle covering some cost on the employer's side of the tip issue legally?

I am from Texas and have been in business 14 years, I employ approximately 85 employees and it is seemingly very hard to make any money in this industry and with the current economic situation it is an uphill battle.

Starting in the new year we are planning to implement some deduction service charges and begin deducting from commissions, a % on Gift Certificate usage and New Client deductions to cover cost related to marketing and service charges from gift certificate companies. We are planning to deduct approximately 10% for the new client and/or gift certificate customer. It would be either/or, not both if customer was a new client and had a GC. Would you be so kind and have some advice on this matter. I look forward to hearing back from you.

Zoe

Zoe, I hope all is well with you. Thank you for your kind comments. In response to your comments:

First of all, the state laws are different. You might want to consider discussing your plans with the Texas Labor Commission or with an attorney that deals with Texas labor laws.

In most states you are not able to charge an employee to work. For example, in most states you cannot have an employee pay for the credit card charge if one of their clients that they receive a commission on charges the tip. As you most likely know, a tip is considered additional money given to the owner and then considered additional wages paid to the employee. This is the case even if the employee gets the tip directly.

Most of the salons and spas that I work with do not allow tips to be charged. Considering credit card charges are getting up to 3% and since credit card sales are becoming more prevalent, allowing credit card tips can really cut into your bottom line.

You must be careful charging a service charge. In California I know of two salons that faced legal proceedings because of the way that they handled the service charge. As I understand,they paid a commission and then after calculating the commission they deducted the service charge. Although I do not know the exact details, I believe that if they would have based the commission on the service after a reduction, they would not have been in violation of the California laws.

I like your idea of a charge for certificates and new clients. I would imagine that it depends on how the compensation formula is worded.

Most labor problems happen after an employee leaves and then files suite.

I hope that this was some help. I currently have a California client that is in mediation for $150,000 for wage issues. Her issue is that she did not have her people clock out for lunch, and in California you must give unpaid time off for lunch.

The laws are very complicated and really loaded on the side of employees. Check with the Texas Labor Commission to make sure that you are within the law. Their website is http://www.twc.state.tx.us/.

Larry Kopsa CPA

QUESTION ON HANDLING TIPS

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

TIP QUESTIONS

The question on tips brought several emails. Here are a couple of the questions or comments and my responses.

Q. In my salon I have solved the tip problem by having my stylists sign a paper saying that they are responsible for any taxes on their tips. My accountant told me that I could do this.

Ashley

A. Sorry, but the person that is advising you is wrong. You, as the employer are required by law to account for tips. By law, tips received by your employees are considered additional wages even though you my never see the money. If you would like more information on tip reporting you can go to the IRS website and do a search, or I have a Tip Book and audio CD that explains tips in detail. Contact my office at 800.975.4829 and ask for Amanda if you are interested.

Q. I have calculated what it will cost me if I start paying taxes on the tips that my stylists receive. I'm not very profitable to start with but don't want to get into trouble with the IRS. I am thinking about putting a sign up that says "No Tipping!" What do you thing?

Karen

A. My first thought is you would need to determine how your employees would feel about not getting tips. This could cause a problem hiring and retaining people. We see articles all the time on the merits of tipping. There definitely are two sides to the issue. As far as the IRS is concerned, even though you have a no tipping policy you would still need to make sure that if the IRS came calling you could justify that you do not receive tips.

Q. Larry, I have to share with you my experience on tips. I decided that as of the first of the year that I was going to have my staff report their tips to me. I was concerned as to how they would react. I took time and explained the law to them. I also shared information from your book and CD. After taking a deep breath I told the stylist my plan to have them report their tips to me. I could not believe their response. They were happy. I heard comments that they were under stress because they were worried about the IRS. Also they said that having the cash which was not reported did not help them with their personal finances. I have only had one nail tech leave to go to a salon that did not require tip reporting. Thanks for your help.

Bob

A. Thanks for sharing your experience with us and thanks for your kind comments.

TIP QUESTION

I am a salon owner who has my stylist claim their tips. My biggest concern is I have to pay taxes on their tips which my company doesn't receive any of the revenue from. Do you have a recommendation on how to offset this or are there any new tax laws coming into effect ? I feel it's a penalty to salon owners and if the IRS would put the entire burden on the stylist, more owners would make sure the staff was claiming their tips.

Frustrated in Nebraska

Dear Frustrated In Nebraska,

You are not the only one that is frustrated over the tipping requiments. The problem hits all salons that are attempting to be honest and follow the law. When you are in an industry that works on such a low bottom line margin to start with; and then you pile on the payroll taxes, workman comp, and other add on’s that you deal with, tax on tips sometimes is the "straw that breaks the camels back." I have had commission salons convert to booth rental back when the IRS started enforcing tip reporting in salons and spas.

What can you do about it? Very little. I do suggest that you make sure that the producers know how much that they are making per hour, including tips. In industries that work on a commission it is easy for the worker to get complacent. Showing them what their hourly pay is when you include tips can be a real eye opener for them, and hopefully will help them appreciate their job more.

Here is another idea that has worked. I have set up a very simple financial chart to show the producers the actual bottom line income of the salon. Not wanting to show all of the information, I use a breakdown based on a $100.00 sale. I first show that the producer gets $40.00 to $50.00 of the sales, depending on the pay structure. I then show the other costs and expenses, giving the salon on the average $3.00 to $10.00 per $100.00 sale. As you can imagine, many times it is less than $3.00. If you use this technique, then show how payroll taxes on tips impacts the bottom line, you may have a window to introducing a service charge to the stylist to offset the additional taxes paid.

The Professional Beauty Association (PBA, formerly TSA) has been working hard in Washington DC to obtain a credit for salons to offset the tax burden. Currently, restaurants have an offsetting credit but salons do not. Go figure? There have been bills introduced in Congress but unfortunately nothing has gotten out of committee.

If you do not belong to PBA I strongly suggest you consider joining. They not only provide a wealth of information, they are your voice in Washington on tipping and diversion. You can visit their website at http://www.probeauty.org/about/.

Let me know if there is anything else I can do to assist.