Does an Employer Need to Pay Tax over Tips

Does an employer need to pay tax over tips? US answers.

Question: May 2011

Does an employer of a restaurant calculate minimum pay wages to wait staff to consider their tips...and how are the taxes reported and on what amount of pay? Tips are paid out of the register each night to the wait staff in the full amount they earned in the tip - nothing is withheld to apply towards the taxto be paid on their wages. It does not seem logical for the employer to pay taxes on the tips for the server when the server retains the full amount of the tip - when figured the server is actually making an average of $12 an hour when tips are added in, the employer is paying taxes on that $12 an hour when in reality the server is not paying the taxes on the money they are earning but the employer is out of their own pocket! Help me understand how this is fair to the employer or correct in any manner!

Answer US

You're writing that you're paying your employees the full amount of tips they've earned, without withholding taxes. The IRS Employer's Tax Guide says under point 6 about Tips, and I quote:

'Collecting taxes on tips.   You must collect income tax, employee social security tax, and employee Medicare tax on the employee's tips. If an employee reports to you in writing $20 or more of tips in a month, the tips are also subject to FUTA tax.'

I advise you to contact your local IRS office to get more information about taxes on tips: