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July 15, 2014

Reporting Tip Income Responsibility Shifts from Employee to Employer

When it comes to tips, employers beware. The burden of accurately reporting cash tips has typically been the responsibility of the employee, but Missouri is now shifting that responsibility to the employer. This is a major change for not only restaurant owners but also for other business owners whose employees regularly receive tips.

If you own a business where tips are part of employee income – from fine dining establishments to spas to lawn services, and everything in-between – review your Reporting Policies, Procedures and Point Of Sale Systems Input to ensure your payroll tax filings and withholdings reflect actual tip income received.

Why the Shift?

To understand this shift, we must first understand a law that has actually been in effect for a dozen years. In a 2002 landmark U.S. Supreme Court case, U.S. v. Fior D’Italia, Inc., the IRS discovered that, on a pro rata basis, tip income reported by the restaurant on bills paid in cash was far less than the amount of tip income reported on bills paid by credit card in the same years. The IRS conducted a “compliance” check and used an “aggregate estimation” method to estimate the actual tips likely received in those years by restaurant employees.  The Supreme Court confirmed the IRS was entitled by tax law to use the aggregate estimation method.

Fast forward to 2014: beginning this year, the Missouri Department of Revenue (MODAR) is applying this same methodology to assess withholding tax liability on Missouri restaurateurs when performing withholding tax examinations which are commonly done in conjunction with sales/use tax examinations.  The state is reviewing tips reported on both cash and credit card transactions.  Most findings, however, are expected to be in the cash sales column because, generally speaking, it’s easier for employees to avoid reporting tips on cash transactions.  Any findings in this area of the examination will result in MODOR assessing withholding taxes as well as penalties and interest.

Are Tips Part of your Employees’ Compensation?
Contact your Anders advisor to learn more about how this could impact your business.

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