New York Tip Tax Calculator:
Withholding Taxes for Tipped Employees
If you manage a restaurant, bar, or any other small business where staff members receive tips from customers, you have the extra duty of withholding taxes from their paychecks based on those tips. Because tips are often paid in cash, there are special tax rules that apply. If calculating tip tax withholdings seems complicated, don’t worry: we’ve created a calculator specifically to handle tip tax.
How the Tip Tax Calculator Works
You simply need to enter your employees’ gross wages, their W-4 withholding information, and the cash and credit card tips they’ve earned into the calculator. The resulting calculation will provide you with the correct withholding tax amount and the resulting net pay.
Are you wondering how recent legislation might affect your business? Get informed on what no tax on tips and no tax on overtime means for employers.
Federal Rules for Tips and Why They Are Taxed
According to Internal Revenue Service (IRS) guidelines, employees must report the dollar amount of cash tips they receive to you by the 10th of the following month (ideally, you’ll already have credit card tip information in your accounting system).
As long as an employee earns more than $20 in tips per month, you are required to take out withholding tax.
Tips are taxed because the IRS views them as income, so they are subject to federal income taxes like Medicare and Social Security. If an employee receives less than $20 in tips from a single employer during a single calendar month, those tips are not required to be reported, and taxes do not need to be withheld. Also, keep in mind that large food and beverage establishments (those with 10 or more employees) must allocate tips when staff reports less than 8% of the establishment’s food and drink revenue.
Employee and Employer Obligations Regarding Tip Income
Employee Recordkeeping
The IRS states that employees are responsible for keeping a record of tips received from customers and providing a copy to their employers. For recordkeeping, workers can use Form 4070a, or Employee’s Daily Record of Tips, or a similar log, and report the total amount of tips to their employer monthly.
Employer Responsibilities
“Uncle Sam” requires employers to keep records of all employee tip income reported to them. Why is this a key item on the employer’s to-do list? These tip records are important because they are used to calculate the proper amount of income taxes and the employee’s portion of Social Security and Medicare tax from the employee’s total wages, including tip income, and to deposit this tax on behalf of the worker.
Additionally, employers are required to pay the employer’s share of Social Security and Medicare taxes, which is based on the total wages paid to tipped employees as well as the reported tip income. In turn, the employer reports this information and tax to the IRS on the appropriate forms.
Keep in Mind
Forgetting or neglecting to report cash tips doesn’t relieve your employee of the responsibility of paying taxes on that income. Since tax evasion likely isn’t on anyone’s mind, keeping tip tax reporting as easy as possible is a benefit for everyone, allowing you to withhold the correct amount of taxes from their base hourly or salaried wages.
To simplify things for you as the business owner, we recommend using a tax tip calculator like the one available at the top of this page to make sure your withholdings are correctly calculated. You can also find restaurant payroll software that makes it easier to automate the process, including submitting all tax filings. The Beyond system can assist with ensuring these calculations are accurate.
Related Reading
After using this calculator and learning more about employer responsibilities concerning tips, we have another resource that can be helpful. From getting your employer identification number (EIN) to maintaining payroll records, learn more about how to do your own payroll.