Archives for December 2023

If you are a client who hires independent contractors, you may need to request a W-9 form from them. In July 2023 the IRS has provided a draft version of an updated W-9 form. The draft form can be found by clicking here.

What You Need to Know About the W-9 Form?

A W-9 form is an IRS document that collects the contractor’s name, address, tax identification number, tax classification. In addition, it collects certification that they are not subject to backup withholding or foreign account tax compliance act (FATCA) reporting. The W-9 form helps you report the payments you make to the contractor on a 1099-NEC form at the end of the year.

Why Do You Need a W-9 Form from Your Contractor?

The main reason is to verify their identity and tax status. If you pay a contractor over $600 in a year, you must report it to the IRS and the contractor. In conclusion, the W-9 form helps you accurately complete the 1099-NEC form, avoiding penalties or audits.

How Do You Request a W-9 Form from Your Contractor?

The best practice is to ask for it before you make the first payment to them. You can send them a copy of the W-9 form by mail, email, or fax. Or you can direct them to download it from the IRS website. In addition, you should also let them know why you need the form and when you expect to receive it back. You can also include a deadline for returning the form and a reminder of the consequences of not providing it, such as withholding taxes from their payments or even possibly terminating their engagement.

What Do You Do With the W-9 Form Once You Receive it?

It is recommended that you review the form for completeness and accuracy. Make sure it matches the information on your contract and invoices. You should also keep a copy of the form in your records for at least four years after the last payment you make to the contractor. You do not need to send the W-9 form to the IRS, but you will use it to prepare the 1099-NEC form that you will send to both the IRS and the contractor by January 31 of the following year.

What Is New on the W-9 Form Updated?

A new section, line 3b, has been added to the form. This line needs to be filled out by entities that pass income and losses to their partners, owners, or beneficiaries (known as flow-through entities). They need to indicate if they have any foreign partners, owners, or beneficiaries, either directly or indirectly. This information is required when the flow-through entity provides a Form W-9 to another similar entity. The purpose of this change is to help the flow-through entity know about its indirect foreign partners, owners, or beneficiaries. This way, it can meet any reporting requirements related to them.

The W-9 form is crucial for tax compliance and avoiding issues with the IRS or contractors. Request it early, review it thoroughly, and store it securely to maintain a smooth relationship with your contractors.

In the meantime, if you encounter any issues or have any questions, we are here to help you with your accounting, QuickBooks, and tax needs. Click here to schedule an appointment.

This material is for informational purposes only. It does not constitute tax, legal or accounting advice.

If you are an employer who manages a restaurant, you may have to allocate tips to your employees who receive tip income in some special situations and you should know the methods of tips allocation that you can chose. You can check here our article regarding “Allocated Tips”.

Methods of Allocation

There are 3 methods of tip allocation that you can use:

• the good-faith agreement method,
• the hours-worked method,
• the gross receipts method.

Each method has its own rules and limitations, and you must choose one method for each calendar year. You may allocate the tips for the respective calendar year either annually, by payroll period or by using reasonable divisions of the calendar year, such as quarters, months, semimonthly periods, etc.

Good Faith Agreement Method

The good-faith agreement method allocates tips based on a written agreement between you and at least two-thirds of your tipped employees of each occupational category (for example, waitstaff, bussers, maître d’s). You can use this method only if the agreement meets certain requirements:

1. Allocates the difference between total reported tips and 8% (or the lower rate) of gross receipts among tipped employees in a way that approximately reflects the actual distribution of tip income among employees,
2. Becomes effective on the first day of a payroll period that starts after the agreement’s adoption date, but no later than January 1 of the following year,
3. Has to be adopted when there are tipped employees in each job category who would be impacted by the agreement,
4. Allows for cancellation through a written agreement adopted by at least two-thirds of the tipped employees in occupational categories affected by the agreement. And the cancellation only takes effect at the start of a payroll period.

Hours-Worked Method

If there is no good-faith agreement and your business has less than 25 full-time employees, both tipped and non-tipped, in a payroll period, you can use the hours-worked method to allocate tips. Your business is considered as having less than 25 full-time employees in a payroll period if the average daily hours worked by all employees per business day, tipped and non-tipped, is under 200 hours.

This method has several steps that you need to follow and you can find the details by clicking here. Furthermore, the hours-worked method allocates tips using a fraction where the numerator is the number of hours worked by each directly tipped employee and the denominator is the total number of hours worked by all directly tipped employees in the respective payroll period. You can use this method only if you meet certain conditions, such as having accurate records of hours worked and tips received by each employee, more details can be found here.

Gross Receipts Method For Tips Allocation

If there’s no good-faith agreement for the payroll period, you can calculate the difference between the total reported tips and 8% of gross receipts using this method. This method has several steps that you need to follow and you can find the details by clicking here. But it is important to know that this method allocates tips based on a fraction that has for the numerator the amount of the establishment’s gross receipts attributable to the directly tipped employee and as the denominator the gross receipts attributable to all directly tipped employees.

Moreover, you can check here an example to better understand this method.

In summary, you must report the allocated tips to the IRS and to your employees. File Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips, to report the tips received and allocated by your establishment. You must also show the allocated tips on each employee’s Form W-2, Wage and Tax Statement, in box 8 and choose a method of tips allocation. You must check on the W-2 form on line 7a, 7b or 7c the method used. However, you do not withhold income tax or FICA taxes on allocated tips.

Besides, you can check our blogs related to these subjects and find out more here.

In the meantime, if you need accounting and tax services for your business, we are here to help. Click here to schedule an appointment.

This material is for informational purposes only. It does not constitute tax, legal or accounting advice.

If you own or manage a food or beverage business, your employees probably receive tips from your customers as part of their income. They can receive tips from customers who pay by credit card, debit card, cash or even gift cards and other non cash tips. Employees must report tips as taxable income to both the IRS and their employer. However, you may also have to allocate tips to your employees in some situations.

About Allocated Tips

These tips are additional tips that an employer allocates to employees on top of the tips that the employees have already reported to the employer. This happens only in certain conditions:

• the employees work in a large food or beverage establishment, like a restaurant, cocktail lounge (to see the definition of a large establishment) and
• the total tips that all employees reported to the employer were less than 8% of the total establishment’s sales of food and drinks.

In simpler terms, if you own a tip-based establishment, like a restaurant, and the total tips reported by all employees are less than 8% of the total food and drink sales they served, you, as an employer will allocate additional tips among all employees who received tips to make up for that difference. These additional tips are called “allocated tips”.

How To Report These Tips?

When an employer allocates extra tips to an employee, the employer reports these tips separately in box 8 of Form W-2. The employer does not include these allocated tips in box 1, where the employer reports wages. Therefore, if box 8 of Form W-2 is empty, it indicates that the employer did not allocate any extra tips.

As an employer, you can use Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips, to calculate and report allocated tips for your establishment. You must file this form by the last day of February of the following year.

The purpose of allocating tips is to ensure that your employees report their tip income correctly to the IRS and pay their fair share of taxes. However, allocated tips are not considered wages for FICA tax purposes, since the employee did not report the amount to the employer, so you do not need to withhold or pay any Social Security or Medicare taxes on them and you do not report them in boxes 5 and 7 of Form W-2. You also do not need to include allocated tips in the regular rate of pay for calculating overtime pay.

If your employees disagree with the amount of tips you allocated to them, they can request a correction from you. They can also show a different amount of allocated tips , if they have adequate records, when filling Form 4137, Social Security and Medicare Tax on Unreported Tip Income, with their tax return.

You can find out more details regarding “Tips Reporting for Restaurants” here.

Lower Rate

If an employer wants to calculate allocated tips using a tip rate less than 8% (but not less than 2%), the employer needs approval from the IRS. Either the employer or a majority of the employees can ask the IRS for this approval. You can request the lower rate by filing a petition that includes specific information about the establishment to justify this lower rate. For details on how to file this petition, refer to the instructions for Form 8027, which is the Employer’s Annual Information Return of Tip Income and Allocated Tips.

Allocated tips are a complex and often a confusing topic for employers and employees alike. If you have any questions or doubts about how to handle them, you should consult a tax professional or the IRS for guidance.

In the meantime, if you need tax and accounting services, we are here to help. We serve small businesses and real estate investors. Click here to schedule an appointment.

This material is for informational purposes only. It does not constitute tax, legal or accounting advice.

About Tips

Tips and wages, while both taxed similarly and subject to income tax, as well as subject to employer and employee withholding for Social Security and Medicare taxes, do have some differences.

Tips reporting for restaurants is a crucial aspect of tax compliance for both employers and employees.

A restaurant employee must include the gross amount of tips they receive as part of their income. Tips can be in the form of cash, credit card payment, debit card payment or non-cash (such as gift cards or free meals).

In this blog post, we will try to explain the basics of tips reporting, the benefits of doing it correctly, and the consequences of failing to do so.

Reporting the Tips

If you are an employer, you are responsible for withholding and paying payroll taxes on tips, as well as reporting them to the IRS and the employees.

Employers must collect a written statement from each employee who receives tips of $20 or more  in a calendar month, showing the total amount of tips received. This statement is due by the 10th day of the following month. If your employees receive less than $20 in tips in a single month from a particular job, they don’t need to report these tips to you.  You must also report the total amount of tips received by all your employees on Form 941, Employer’s Quarterly Federal Tax Return, and on Form W-2, Wage and Tax Statement. You must deposit the taxes you have withheld according to your federal tax deposit requirements.

Every year, some employers are required to report to the Internal Revenue Service their total sales and the employees’ tips received. You need to use Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips, for this purpose. This form is also used to calculate the allocated tips for employees who receive tips. In simpler terms, for example, if you own a restaurant, you need to tell the IRS how much you sold and how much your employees got in tips every year using Form 8027.

Penalties

Tips reporting for restaurants also has serious consequences for both employers and employees if done incorrectly or not at all. The IRS can impose penalties and interest on employers who fail to withhold and pay payroll taxes on tips, or who fail to report tips to the IRS. The IRS can also impose penalties and interest on employees who fail to report their tips to their employers or on their tax returns. In addition, both employers and employees can face criminal charges for tax evasion or fraud if they intentionally underreport or conceal tips. The IRS may charge a penalty of 50% on the Social Security, Medicare, additional Medicare, or railroad retirement taxes owed on any unreported tips.

Both employers and employees must legally report tips in restaurants. This represents a legal obligation, not an optional task.

If you need help with your business tax and accounting, we are here to help. We serve small businesses and real estate investors. Click here to schedule an appointment.

This material is for informational purposes only. It does not constitute tax, legal or accounting advice.