Restaurants run on thin margins and a lot of payroll, and tips add a layer of tax rules other businesses never see. Getting tip reporting right affects your payroll taxes, a credit you may claim and your employees’ own returns.
The points where tax and accounting rules come into play are numbered.
Numbered points are explained below.
At: Serve
What you call a charge on the bill changes how it is treated for payroll and for your staff’s own tax. Mandatory service charges and auto-gratuities are not tips, and when paid to staff they are generally wages; the difference matters for the qualified tips deduction employees can claim for 2025 through 2028.
We review how your charges are set up and how they are paid out.
At: Take payment and tips
Tips feed your payroll taxes and your employees’ own returns, so gaps in tip reporting show up on both sides. Employees must report cash tips to you by the 10th of the following month, unless they total less than $20 for the month; large food or beverage establishments also file Form 8027 each year to report receipts and tips and figure allocated tips.
We reconcile point-of-sale and tip data to the bank every month and check whether Form 8027 applies to you.
At: Pay suppliers and payroll
Tips add to the Social Security and Medicare tax you pay as an employer, and a credit can offset part of it. Certain food and beverage employers can claim a credit for Social Security and Medicare taxes paid on employees’ tips, on Form 8846; it is part of the general business credit.
We work the credit into the return and the year-end plan.
No. A mandatory charge added to the bill is a service charge. When you pay it to staff it is generally treated as wages, not tips.
Employees in qualifying occupations may deduct qualified tips for 2025 through 2028, within limits. The tips must be reported on a W-2 or other information return, or by the employee on Form 4137.