Tax Help Blog

Tax blog posts, news, videos and more from our team of experts!

How Do I Account For Gratuities In My Payroll? [Ask The Experts Q&A]

Sep 13, 2011

Q: We own a small restaurant and I am unsure how to account for tips which the staff declares in the Point of Sales System at the end of the day. 

How do I deal with the tips per pay period? For example, we have two GMs/bartenders who each make $250 a week (no hourly). I have figured out how to deal with payroll taxes on this set amount, but how do I account for the tips that they get on credit cards?


A: Your question is a very good one and one that I personally always thought was cumbersome. The first key point is that tips are taxable income to the employee and should be included on their W-2 at the end of the year. Secondly, the tips are subject to federal income tax withholding and are also subject to FICA, Medicare and FUTA tax withholding. That is the cumbersome part, since much of the tip income is in cash and you may never know about it.

So, the first key point is that the employee is required to report to the company the tips that they receive. The tips that they report are included on IRS Form 4070, Employee’s Report of Tips to Employer. It can be a different form if that is easier; the IRS just gives us this form so that we don’t have to come up with one on our own. The employee is supposed to provide that information to you by the 10th of the following month.

You will then use that report to complete your payroll calculations. You are required to withhold all taxes from those amounts as well, but you don’t have the cash on the front end. You, therefore, simply withhold that amount from their regular check or any other payments that you would normally make to them. If there isn’t enough other money to withhold, then you can just indicate that on the quarterly payroll tax return as an adjustment.

The bottom line is that the tips DO need to go on the payroll tax returns and the W-2 at the end of the year, and are treated just like other income when it comes to withholding, FICA, Medicare, FUTA, etc. The IRS has a good publication to help with the detail called Publication 15, Circular E, Employer’s Tax Guide. You can download the publication for free from the IRS website at . Check out chapter 6, which is exclusively about tips.

Share This Page...

Tax News

    New Tax Law

  • Question: So...Exactly WHAT am I supposed to be doing with regard to the new tax law? Answer: First of all Happy New Year and welcome to 2018. It is gonna be a good year!!! Regardless of all other factors from this point forward, we will indeed have a new tax code for 2018. I am totally sure you have heard more than you would normally choose to hear about taxes and will undoubtedly continue to hear more. Just in case, here is a summary of the biggest changes…
    Posted on Jan 30, 2018
  • Getting a Loan While Self-Employed

  • Qualifying for personal loans when you are self-employed can be very difficult, especially in today’s economic climate.
    Posted on Jun 03, 2013
  • Ask The Experts: Health Insurance for Employees

  • Q: I’m about to hire my first employee and I have a few questions. Am I required to provide health insurance? Can I provide a health insurance stipend and have that qualify as providing health insurance? What is a reasonable amount to provide as a health insurance stipend?
    Posted on Jun 03, 2013
Want to read more tax news articles?  Click here

NASE Minute Tax Videos

  • Self Employment Tax

    As a self-employed business owner, you are the employee and the company. Make sure that self-employment tax is part of your business plan.
    Posted on Jan 10, 2018
  • Preparing an Audit Proof Tax Return

    Learn how to file an audit proof tax return
    Posted on Jan 10, 2018
  • Are Quarterly Estimated Tax Payments Really Needed?

    Find out more about quarterly estimated tax payments. How much should my quarterly payment be and what happens if I do not make payments? What are a 3 safe harbors to help you avoid penalties? Always remember, do not pay in more taxes than you have to.
    Posted on Jan 10, 2018 by Katie Vlietstra

Want to see more tax videos?  Click here

Still Have Questions?

Ask The Expert