When it comes to tips, restaurant owners have specific reporting responsibilities. The tip system makes payroll practices more complex and harder to streamline. To avoid issues with the IRS while keeping employees satisfied, it's imperative to set up a comprehensive restaurant reporting structure.
The IRS requires that employers submit Form 8027 "Employer's Annual Information Return of Tip Income and Allocated Tips" at the end of each year. However, filling out appropriate IRS forms while making sure all documents and data are in order can be a tough task. Many restaurant owners struggle to give the HR department the right tools to keep tip reporting updated and compliant.
The following tips can help simplify your payroll responsibilities and create a workable tip reporting structure.
1. Prioritize Your Onboarding Process
While it doesn't relate to restaurant reporting directly, streamlining your onboarding process comes with a variety of benefits.
The annual restaurant turnover rate exceeds 75%, making reporting complicated. When employees come and go, your HR department needs to exercise extra control over tip-related income and allocated tips as well as withhold income and FICA taxes without leaving anything out.
Regular changes to the workforce contribute to reporting errors. By working on a more successful onboarding process, you can reduce the employee turnover rate and the extra work that comes with it.
Additionally, an engaging onboarding process is the key to an outstanding guest experience, which in turn builds brand loyalty and brings more diners to your doorstep. Creating a satisfactory environment for your staff can help your restaurant thrive.
Restaurant People Cloud's digital onboarding services are specifically designed to simplify the onboarding process and create a stellar company culture. In turn, this can set the stage for better payroll and reporting practices.
2. Stay Up To Date On The Minimum Wage
Tipped employees have a lower minimum wage than non-tipped employees do. The federal minimum wage for non-tipped workers is $7.25 per hour. Meanwhile, the federal minimum wage for tipped workers is $2.13 per hour. This means that the total hourly wage ($2.13 + tips) must be equal to or exceed $7.25.
The size of the minimum wage for tipped workers depends on the state they live in. The state legislature changes frequently, forcing restaurant owners to keep up. By missing even the slightest change related to minimum wage requirements, your business could be facing serious consequences, from fines to imprisonment.
Failing to stay up to date with the minimum wage laws can also affect your reporting system. This can lead to IRS audits and other unexpected results. By adjusting your payroll and tip reporting system to the law immediately, you can ensure full compliance and avoid substantial fines.
3. Create An Employee Tip Reporting System
The integrity of your restaurant reporting system depends on how well your employees report tips. According to the IRS, tipped employees must report tips to the employer if the amount they receive exceeds $20 per month.
It's the employer’s responsibility to create an employee tip reporting system that all information reaches the HR department in time.
An employee should keep a daily record of tips they receive. However, if an employee receives a non-cash tip (tickets, passes, gifts), it's their responsibility to report them on their tax return.
Your employees should have a clear understanding of how each tip must be reported. They can do it by filling out form 4070A "Employee's Daily Record of Tips." However, you can also create your own electronic forms to simplify the process. Consider keeping these forms on the cloud, so employees can access them anytime and anywhere while eliminating unnecessary paperwork.
While it's the employee's responsibility to report tips, an employer must simplify the process in order to avoid mistakes or omitted data.
4. Claim The FICA Tip Credit
When filing business tax returns, restaurant owners can claim a FICA tip credit. This can be reported on IRS Form 8846 (Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips).
If tips your employees receive exceed the federal minimum standards, you can qualify for the tip credit. To calculate how much credit you are entitled to:
- Multiply the number of hours an employee worked by $7.25 (federal minimum wage)
- Subtract the total wages (not tips) paid to the employee and get the number of tips that aren't eligible for FICA tip credit.
- Subtract the amount of non-eligible tips from the total tips reported by the employee to get the amount of eligible tips.
- Multiply the amount of eligible tips by the combined FICA and Medicare tax rate (7.65% in 2021) to determine the amount of credit.
FICA tip credit can be extremely helpful for your business. However, without the right restaurant reporting system, it's hard to claim it.
5. Allocate Tips
As an employer, you need to allocate tips to your employees. To do it, you can use the above-mentioned Form 8027. Employees are entitled to allocated tips (in addition to the tips reported by the employee) if the total reported tips during the payroll period are less than 8% of grossed sales during that same period.
Each employer can design a system for tip allocation. For small restaurants, it's based on the hours worked. Larger restaurants determine allocated tips based on the percentage of gross receipts from each worker compared to the total receipts from all staff.
Allocating tips can be a complicated process. Restaurant People Cloud can create an 8027 report through the isolved platform to make allocation straightforward and accurate.
Restaurant Reporting Made Easy
While it seems complex, restaurant reporting doesn't have to be frustrating. With the right technology, it's possible to stay up to date with all the changes and ensure straightforward reporting and compliance.
Restaurant People Cloud is designed specifically to maximize your restaurant's payroll and HR efficiency and improve your reporting process. To learn more, please contact us at any convenient time.