Employees who receive $20 or more in cash tips per month must report them to you, their employer, by the 10th of the following month. Cash tips include:
- tips received directly from customers,
- tips from other employees under any tip-sharing arrangement, and
- charged tips (from credit and debit card transactions) that you distribute to the employee.
As the employer, you are required to withhold income tax and FICA taxes on any reported tip amount from the employee’s wages. If the tax withholding amount exceed the employee’s wages, the employee must pay the difference directly to the IRS on their income tax return. If the withholding amount exceeds the employee’s wages, withhold the taxes in this order:
- FICA taxes on the employee’s wages,
- Federal income taxes on the employee’s wages,
- State and local taxes on the employee’s wages,
- FICA taxes on the employee’s reported tips, and
- Federal income taxes on the employee’s reported tips.
You are also responsible for paying the employer’s portion of FICA taxes on reported tips.
It is your responsibility to verify the amount of tip reporting, but it is your employee’s responsibility to report all tips to you correctly.