Small Business/Self-Employed/Other Business > Form W-2, FICA, Medicare, Tips, Employee Benefits

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Frequently Asked Tax Questions

Small Business/Self-Employed/Other Business - Form W-2, FICA, Medicare, Tips, Employee Benefits

Rev. date: 1/1/2011

As an employer, do I have any liability if my employees receive tips but don't report them to me?

Allocated Tips
Employee's Daily Record of Tips and Report to Employer
Employment Tax
Reporting Tip Income
Tip, Daily Record
Tips on Tips - A Guide to Tip Income Reporting for Employees Who Receive Tip Income
Tips on Tips - A Guide to Tip Income Reporting for Employees Who Receive Tip Income (Spanish version)

Employers in industries where tipping is common know that they must pay the employer share of social security and Medicare taxes on tips which employees report to them. However, many employers do not realize that they may be liable for the employer share of these taxes on tips employees do not report to them. For tips which the employees did not report to the employer, the employer’s liability does not arise until the Service issues a Section 3121(q) Notice and Demand.

You, as an employer, have a liability to withhold and pay the employee share of social security and Medicare tax on tips which your employees report to you to the extent that wages and other employee funds are available. You must also pay the employer share of social security and Medicare tax on all tips reported to you by employees.
Employees who customarily receive tips are required to report their cash tips to their employers at least monthly, if they receive $20 or more in the month. Cash tips include tips received directly in cash or by check from customers, charged tips distributed to the employee by his or her employer, and tips received from other employees under any tip-sharing arrangement.
For tips which the employee does not report to you, your liability for the employer share of social security and Medicare tax does not arise until the Service issues a Section 3121(q) Notice and Demand to you. The Service may issue the notice and demand based on tip audits using estimates, including data from Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips, or based on information the Service collects from employees’ Forms 4137, Social Security and Medicare Tax on Unreported Tip Income.
Form 4137 is used by employees to report and pay their share of social security and Medicare tax due on tips they did not report to their employer. This includes any tips allocated to employees of large food and beverage establishments. Generally, employees must include the allocated tips as income on their income tax returns unless they have adequate records to show that they received less tips in the year than the allocated figures.
If you are a large food or beverage establishment (more than 10 employees on a typical day and food or beverages consumed on the premises), you are required to allocate tips if the total tips reported to you are less than 8% of gross sales. Report the allocated amount on the employee's Form W-2 at the end of the year.

Additional Information

2010 Form 8027 (PDF)2010 Inst 8027 (PDF)Publication 1244 (PDF) Employee's Daily Record of Tips and Report to Employer Publication 531 Reporting Tip Income Publication 15 Circular E Employer's Tax Guide Tax Topic 761 Tips - Withholding & Reporting

Rev. date: 1/1/2011

If the reported tips from employees of a large food and beverage establishment are 8% or more of sales, must an employer still allocate tips to the employees?

Allocated Tips
Tip, Daily Record

Tip allocation is only required when the amount of tips reported by employees of a large food or beverage establishment is less than 8% (or an approved lower rate) of the gross receipts (other than nonallocatable receipts) for the given period.
If the employees are reporting more than the 8%, or more, there would be no allocated tip amount.
The employer must still file Form 8027 (PDF), Employer's Annual Information Return of Tip Income and Allocated Tips.
The employer is also still required to withhold and pay taxes with regard to all reported tips.

Additional Information

Publication 1244 (PDF) Employee's Daily Record of Tips and Report to Employer Publication 531 Reporting Tip Income Form 8027 Instructions Employer's Annual Information Return of Tip Income and Allocated Tips Publication 15 Circular E Employer's Tax Guide

Rev. date: 1/1/2011

When an employer provides day care assistance, should the employer's contribution be reported in box 10 of Form W-2?

Dependent Care Benefits
Wage and Tax Statement (Info Copy Only)

Yes.

Report the value of all dependent care assistance you provide to an employee under a dependent care assistance program in box 10 of the employee's Form W-2.
Include any amounts you cannot exclude from the employee's wages in boxes 1, 3, and 5.

Additional Information

Publication 15-A (PDF) Employer's Supplemental Tax Guide Form W-2 (PDF) Wage and Tax Statement Publication 15-B (PDF) Employer's Tax Guide to Fringe Benefits Publication 535 Business Expenses

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