Tips on Tips

Today TaxMama hears from David in Arizona who got an unpleasant surprise. “I work for a restaurant that has not collected tip income info from our wait staff, and has not done any subsequent withholding. I am the lucky one who inherited payroll responsibility mid-year. I just learned of this oversight when prepping W2’s for ‘09. What kind of trouble are we in?

And what kind of trouble am I in with the IRS? What is the best course of action now, after the fact?”

Dear David,

Don’t you feel lucky to be entrusted with such responsibility?

What to do now? The first thing to do is to issue everyone a tip book and have them start tracking and submitting tips from now on. Give them each their own Publication 1244 – it has pages where your staff can enter the tips they receive.

You can order the booklets from IRS at no charge. Just call 1-800 TAX FORM (800-829-3676). Remember to issue the books to anyone who is sharing the tips – the cooks, bus-staff, hosts, etc.

The past is done, there’s nothing much you can do right now, since the restaurant would have had to collect taxes on those tips. It would be a major hardship to get that money back from the employees now. Do you think they even have it?

You can protect the restaurant, to a degree, by advising all the staff, in writing, to report their tips on their personal income tax returns. They may use Form 4137 to report the tips. This form is specifically designed so the employee only pays their share of Social Security and Medicare taxes on their tips, instead both their share and the employer’s share, as well.

In how much trouble is the restaurant? A lot will depend on the size of the restaurant. For more information about the restaurant’s responsibility, please read the information on the IRS Restaurant Tips page.

As for you – protect yourself. Do not put yourself in the position of having signature authority of the restaurant’s bank accounts – especially not the payroll account. Worst case, you could find yourself personally responsible for any payroll taxes that might be assessed against your boss if IRS or your state were ever to conduct a payroll audit. Consider looking into insurance or bonds that might cover your actions – have the restaurant pay the cost.

Also, consider consulting with a good tax professional who is expert in payroll tax audits and issues.

Perhaps there is a way to fix the 2009 payroll that won’t cause a huge hardship to everyone.

Get the consultation before everyone files their tax returns.

Keep an eye on the comments to today’s TaxQuip – at  to see if anyone else has good advice.

And remember, you can find answers to all kinds of questions about tips and other tax issues, free. Where? Where else? At

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