Employer and form 4137

[WhiteOleander]

If a t/p does not report their tips to the employer, they report the tips on form 4137 for the FICA, and the tips go to line 7 as income.

Has anyone ever had an employer hear from the IRS as to why the tips were not reported through them?

[Koss]

Form 4137

I don't think the IRS is particularly interested in that aspect.

There are several reasons why an employee might not report tips to the employer:

(i) ignorance or naivete, i.e., the employee just doesn't get it, until after the end of the calendar year, when he is enlightened by his accountant, or

(ii) tips under $20/month do not have to be reported to the employer but nevertheless must be reported on the employee's tax return.

The obligation to report the tips rests soundly with the employee--not the employer. Even if the IRS wanted to know why the tips weren't reported, that question would need to be directed to the employee--not the employer.

BMK

[BHoffman]

Isn't there some requirement that the ER FICA for tipped employees be a minimum percentage (that little ringing bell is saying 8%) of sales?

What about forms 8027 and 8846? Anyone ever file these?

Here is a link to IRS info for restaurants:

http://www.irs.gov/businesses/small/industries/content/0,,id=98720,00.html

Please share info. I just picked up a few restaurants that qualify as "large establishments" and am researching this. Sometimes researching leads to a lot more questions than answers .

[Koss]

Allocated Tips

I think you're referring to allocated tips.

Under certain conditions, if the tips reported by the employee to the employer do not reach a certain minimum threshold, then the employer is required to allocate to the employee the difference between the minimum and the amount reported by the employee.

The allocated amount has its own box on Form W-2.

A few observations:

(1) The employee can choose to accept the allocation or reject it. If the employee has a proper record of all tips they actually received, then they can use that amount instead of the allocation. If they actually reported all tips that they received, and the records they kept support the amount that they reported, then they can ignore the allocation altogether. But they need to be prepared to produce the record if the IRS requests it.

(2) The threshold is not 8%. The amount is determined by several variables, which include the region and the type of restaurant.

None of this changes my original answer. The reporting requirements for the employer are very different from the reporting requirements for the employee. Are you doing a return for the employee, or are you doing the payroll and W-2 forms for the employer? Or both?

BMK

[BHoffman]

Burt - thanks so much for sharing your experience with me.

I'm doing the monthly accounting and tax for the restaurant. They have a professional payroll company preparing their payroll. I have nothing to do with the employees.

[Jesse]

(1) The employee can choose to accept the allocation or reject it. If the employee has a proper record of all tips they actually received, then they can use that amount instead of the allocation. If they actually reported all tips that they received, and the records they kept support the amount that they reported, then they can ignore the allocation altogether. But they need to be prepared to produce the record if the IRS requests it.


BMK

I encountered this with a Pizza Hut employee. I did not do the payroll but only the employee's tax return. He reported less than the allocated tips and he did receive a request from the IRS to produce records of tips or pay the requested tax balance due. He did indeed have the records which we copied and remitted to the IRS. He received a "Thank you" letter from the IRS with zero balance due.

[WhiteOleander]

No I'm not talking about allocated tips.

Client comes in. She is a waitperson at a local restaurant. Her W-2 shows 4,000.00 in box one. No allocated tips. She wants to report 10,000.00 in tips. When asked why these were not reported to the employer, she states she did not want to.

Now, there is obviously a chance that the client is inflating income to increase the EIC. But, I wondered if the IRS would contact the employer and ask why they (the employer) didn't see that the employee reported the tips to them as required.

[Gene V]

Inform her of the penalty for not reporting tips

may she will change her mind:

Penalty for not reporting tips. If you did not report tips
to your employer as required, you may be charged a
penalty equal to 50% of the social security and Medicare
tax due on those tips. You can avoid this penalty if you
can show reasonable cause for not reporting these tips to
your employer. To do so, attach a statement to your
return explaining why you did not report them.

[Jesse]

Now, there is obviously a chance that the client is inflating income to increase the EIC. But, I wondered if the IRS would contact the employer and ask why they (the employer) didn't see that the employee reported the tips to them as required.

Ouch - I don't really have an answer to your question, but the EIC fraud would scare me. Can they provide proof that they actually received the tips, bank deposits or something?

I can only recall having filed a Form 4137 for an Environment Specialist as he called himself (garbage man) who actually said he received some tips he wanted to claim - no EIC involved and as far as I know his employer wasn't contacted. He switched jobs since then so even if Employer was contacted he probably wouldn't know.

[BHoffman]

What about tips paid on a credit card, but not reported to the employer by the employee? If the employer has reports that show this information (CC tips by employee), does that make the employer liable for reporting the tips? The employees usually take CC tips out of sales paid in cash so the net house receipts match the sales figures.

I'm not particularly going to sweat this, but would like to make sure my client (employer) is covered.

[WhiteOleander]

may she will change her mind:

Penalty for not reporting tips. If you did not report tips
to your employer as required, you may be charged a
penalty equal to 50% of the social security and Medicare
tax due on those tips. You can avoid this penalty if you
can show reasonable cause for not reporting these tips to
your employer. To do so, attach a statement to your
return explaining why you did not report them.

It's a chance they are willing to take. EIC on 10,000.00 is roughly 2900.00. FICA is somewhere around 600.00.

So, the penalty would be 300.00. She got 2900.00. She' still way ahead. And she only pays the penalty if she's caught.

[CinSee]

Believe it or not there are some employers who discourage reporting tips. My daughter's first job was as a waitress. I explained the requirement of reporting tips. Her employer did not advise the employees to report their tips or ask any questions. Since she started late in the year she reported her tips on Form 4137. The next year She reported her tips and they cut her hours down over 50%, stating that if they had to pay taxes on her tips they couldn't afford to have her work as many hours. We called the wage and hour department and they said there was nothing they could do about it.

[BHoffman]

Sorry for beating this to death. Does anyone have an answer to my prior question?

"What about tips paid on a credit card, but not reported to the employer by the employee? If the employer has reports that show this information (CC tips by employee), does that make the employer liable for reporting the tips? The employees usually take CC tips out of sales paid in cash so the net house receipts match the sales figures."

Like I said, I'm trying to make sure my client (the employer) is covered.

Thanks for any replies.