Reporting Tips In Payroll

February 10, 2020
By April L. McDaniel, CPA, CRSP

Quite often I am asked about technicians and salon owners reporting tips in payroll.

My mind immediately goes to the simple answer and that is that, it’s the law. If you don’t report your tips you are breaking the law and you could be committing tax fraud. If you are audited the auditor will know that you get tips. IRS auditors do get their hair cut. They know. The IRS has an audit guide specific to the beauty industry and it states that tips can be 8% to 15% of service sales. That number can be material.

Technicians are required to report any tips over $20 in a months’ time. This includes cash, non-cash (“gifts”) and credit card tips. What are gifts? I’m using the term “gift” to represent if a client gives a technician tickets to a show, bottle of wine, etc. These are tips – disguised as gifts. The value of these items are includable in wages and subject to tax. There really is no such thing as a gift in this case.

The operational side of reporting tip income in payroll after the technician has already received the tip is something you should discuss with your payroll provider or payroll software representative. It’s important that the dollars are reported but you don’t want to pay them out a second time. In a sense, they are put in and taken back out on the payroll. This allows the tax to be calculated and then remitted on those dollars. Make sure you ask. You don’t want to mess this up.

There are a lot of reasons besides the law that you should report tip income. Here are some that come to mind.
• Help if getting a loan.
• Peace of mind.
• Better money management.
• Money in retirement – social security & medicare is based on contributions

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