Replies to This Discussion

Permalink Reply by Phil Proteau on August 8, 2008 at 4:54am

There is a pretty standard system that Baristas use. Lets say one Barista opens at 6am and works solo for the firs hour and earns $3 in the tip jar. The next Barista comes in at 7 and Barista #1 pockets the tips. They work till 11am and the tip jar fills with $10. At 11 a third Barista clocks in. #1 and #2 split the money. Barista #1 leaves at 12 noon and sees that another $6 is in the tip jar and they all take a third.

So basically the tip jar is split every time a new Barista clocks in or out. They earn a fair split of the hours put in, not a portion of the total day's accumulation of tips (which would cause a fight).

There are circumstances where one Barista has a particularly nice interaction with a customer, and the customer puts a an extra large tip in the jar, like a $5 bill or larger. That Barista will feel like they received this tip personally and will want to separate it from the total tips for themselves. You will need to have a policy on this that all Baristas know and understand before hand, or there will be another fight.

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Permalink Reply by Joseph on August 8, 2008 at 5:08am

Concerning credit card tips, the advice is to not have them. Its a hassle having to calculate the cc tips each week or however often and pay the employees a check or cash for their share. Cash tips with the previously mentioned method is best.

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Permalink Reply by Denise Smith on August 8, 2008 at 5:12am

Here are three other situations:

Is there anything wrong with not having a tip jar? I always thought it odd as a customer to see a tip jar there and I haven't even tasted my product... how do I know if they have done it properly.
I've have pretty products with limited interaction and only average taste but only learn the results after my money is in the jar... that stinks!

As a customer I have also not been sure if the tip jar is only for the Barista or for the person who fixes my food as well. What if I don't order a specialty drink... do I still tip?

I have also seen tips for charity. All workers understand that the tips go to a designated charity (identified on the jar). Then the employer pays a good and honest wage and even matches the the jar amount. It is publicized with a thank you to the generosity of the customers for helping the employes raise X dollars for charity. I give generously to those tip jars.

I do agree with Phil though if you are having a tip jar for the baristas then his method of division is good.

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Permalink Reply by Joe Stormer on August 8, 2008 at 7:28am

Most baristas I know would be incapable of feeding themselves if they didn't receive tips, including credit card tips. If you don't allow your baristas to receive tip money, you will need to increase their wages if you want to offer competitive wages.

I agree with Phil's method; I have never seen any conflict resulting from it. On the contrary, I have seen a great deal of greed, corruption and unabashed theft resulting from pooling the tips and distributing them every pay period.

I also disagree with Joseph; it is routine and non-problematic for baristas to put cash from the till into their tip jars according to the credit card tips they've received during their shift.

Denise Smith said:

Here are three other situations:

Is there anything wrong with not having a tip jar? I always thought it odd as a customer to see a tip jar there and I haven't even tasted my product... how do I know if they have done it properly.
I've have pretty products with limited interaction and only average taste but only learn the results after my money is in the jar... that stinks!

As a customer I have also not been sure if the tip jar is only for the Barista or for the person who fixes my food as well. What if I don't order a specialty drink... do I still tip?

I have also seen tips for charity. All workers understand that the tips go to a designated charity (identified on the jar). Then the employer pays a good and honest wage and even matches the the jar amount. It is publicized with a thank you to the generosity of the customers for helping the employes raise X dollars for charity. I give generously to those tip jars.

I do agree with Phil though if you are having a tip jar for the baristas then his method of division is good.

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Permalink Reply by Kelli on August 8, 2008 at 7:56am

We use the same method for splitting tips. We also accept credit card tips and split them at the end of the shift as well. As the owner when I am working a shift with my employees I do NOT take a share of the tips. Only if working alone do I make any tips - I have even been known to work the morning shift and leave those tips for the afternoon shift - to make up for slower tip days of the week.

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Permalink Reply by Mike McGinness on August 8, 2008 at 9:00am

At my Kafe we don't split tips by shift but rather by total day based on ratio of hours worked. Tips available the next day, both cash & cc (less 4% of cc). Why? Some shifts are busier than others, there's both front of house and back of house work (40% revenue is food) and opening and closing shifts have time not during open hours producing sales yet actually have some of the most grunt work rather than the fun behind the espresso machine. (As owner I open and/or close over half the time so believe me I know the work involved, it's Thursday morning and already over 50hrs recorded this week...) Our pre-opening shift is a full hour before open to bake our scratch muffins, scones, quiches etc. I also don't share in the tips.

If tips aren't reported and included in payroll deductions the IRS will assume an amount when employee files their taxes, which can often be more than actual.

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Permalink Reply by Chris/Dale on August 8, 2008 at 10:20am

Our cafe does a payroll every other week (1rst and 3rd)and accumulates the tips over a two week period (2nd and 4th) disperses them based on the ratio of hours each employee works(even cooks,bakers, expo etc etc.) that way we get something every week and every worker is rewarded (as opposed to just the baristas) ...we're all bourgeoisie around here.

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Permalink Reply by Brady on August 8, 2008 at 11:28am

I agree with everything Joe said (Phil too, by extension). Let's add another reason for the system described... the working bar staff takes care of it while they are still there. One less thing for a manager to mess with (and potentially abuse).

Denise... I'd venture to say that most of the working baristas on here would agree with Joe - tips are a vital part of our income and seem to be pretty widely understood and accepted by many customers. Regarding your point on drink quality... I believe that today's tips (which I forgot to grab...$#%@!) were based partially on the quality of the drinks that I gave today's customers on Monday and Wednesday. Can't prove it... don't want to try :)

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Permalink Reply by Shawn on August 8, 2008 at 1:32pm

I worked (barista and manager) in a tip "pooling" environment for 3 years and recognized early on the sense of fairness, teamwork, unity, etc. that comes with a system that rewards baristas from all day parts equally for their contributions. Tip pooling is kinda dicey, though, and has been challenged in court recently partly because our industry doesn't have standards for management positions. (Is a shift supervisor a manager?)

I currently work in a shop where the tips are divided the second another barista arrives or leaves and I recognized early on that there is some huge sums of money to be had when working the morning shifts. The potential income when working the "money" shifts is a great motivator for some baristas.

Each method works well when you're staff is taken care of and involved. Each method is also prone to abuse and greed. Whatever way you go, your most important move is to establish your system for tip distribution upfront while interviewing candidates. Speak to your system's plusses and be realistic (or maybe modest) when talking about total pay. Let the potential barista decide if they're comfortable with the pay.

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Permalink Reply by Adrian Badger on August 8, 2008 at 2:16pm

Thanks to everyone for their feedback, it is extremely valuable. Am I correct in assuming that the employee is then fully responsible for reporting "tip income" to the IRS (cash or credit card) and not the business owner?

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Permalink Reply by Benza Lance on August 8, 2008 at 2:19pm

I'm startin to become accustomed to saying this:
what joe said.

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Permalink Reply by Mike McGinness on August 8, 2008 at 4:36pm

Adrian Badger said:

Thanks to everyone for their feedback, it is extremely valuable. Am I correct in assuming that the employee is then fully responsible for reporting "tip income" to the IRS (cash or credit card) and not the business owner?

As a business owner assuming anything relating to taxes or relying strictly here on BX for information would be foolish IMO.
Here's an article from The CPA Journal Online you may benefit from:

Employer's burden: reporting tax on tip income.
by Zanon, Steven


Abstract- The IRS is scrutinizing tip income more closely since it estimates that 84% of all tip income totalling approximately $500 million goes unreported annually. TEFRA 82 covers the reporting of tips by the employees of restaurants and bars. Sections 3121(a) and 3401(a) consider tips to be wages and taxable. Tips are gratuities made by a customer to a waiter or waitress and should not be confused with service charges. Employees must maintain records to establish the amount of tip income earned annually, and all employees receiving a minimum of $20 per calendar month must provide a written statement reporting such tips to the employer. Employers generally are required to report 8% of all food and beverage receipts as tip income. The standard minimum tip rate of 8% is in practice adjusted by the IRS in accordance with local demographics and statistics.


Tip income has been scrutinized more than ever during the past five years. The IRS estimates that 84% of tip income, approximately $500 million each year, is never reported. TEFRA 82 was designed to provide for reporting of tips by employees of food and beverage establishments.

Tips are included under the definition of wages and considered taxable under Secs. 3121(a) and 3401(a). The IRS states that lost tax revenue from tip income ranks second to the revenue lost on illegal activities.

TIP VERSUS SERVICE CHARGE

A clear distinction should be made between a tip and a service charge, as there is a significant difference in an employer's reporting requirements for each.

A tip is a gratuity payment made by a customer to a waiter or waitress. The customer has the right to determine the amount given and is free from compulsion. The absence of any of these factors creates a doubt to whether the payment is a tip or a service charge.

A service charge is an amount added to a customer's check by management. IRS regulations state that a service charge is considered a part of the enterprise's gross receipts. In the case of catered affairs and banquets, the amount so charged is agreed upon in advance by the customer and management. Because the service charge is considered a part of gross recipts, many state tax authorities have argued that it should be subject to a sales tax. However, a discussion of that issue is beyond the scope of this article.

OBRA 87 requires that, effective January 1, 1988, the full amount of an employee's tips are subject to FICA tax for both employers and employees with a top limit that usually increases each year. Beginning in 1991, the wages for the two parts of the FICA tax, (social security and medicare), are different. Employers can no longer combine and report the withholding as a single amount. Forms 941 and W-2 will require employers to separately report these amounts. This tax is to be paid from deductions from wages, exclusive of tips under the control of the employer or from funds received from the employee for making the payment. A discussion and example of priority of the application of taxes withheld is presented in the tax withholding section of this article.

EMPLOYEE VERSUS

EMPLOYER REPORTING

REQUIREMENTS

An employee must maintain sufficient evidence to establish the amount of tip income received in a tax year. Such records should include:

* Tips received directly from customers and other employees;

* Tips received on credit card receipts;

* Tips paid out to other employees; and

* Names of employees to whom tips were paid.

A daily record on IRS Form 4070A, Employee's Daily Record of Tips, or other credible or reliable evidence is usually sufficient. However, these will not constitute sufficient evidence if there are facts and circumstances indicating that an employee received a larger amount of tip income.

Each employee who receives tips amounting to $20 or more in any calendar month, considered wages under Sec. 3121(a), shall report all such tips in a written statement to the employer on or before the tenth day following the end of the month. This statement should include:

* Employee's name, address, and social security number;

* Employer name and address;

* Period covered by the statement;

* Signature of employee and date submitted; and

* Total amount of tips received.

Tips that a taxpayer must report to his or her employer are considered to be received at the time the employee furnishes the written report to the employer Sec. 451(c).

In determining the employer's liability for the FICA taxes where no statement of tips was furnished by an employee or where the statement was inaccurate or incomplete, tips will be deemed to be paid by the employer on the date on which notice and demand for tax is made to the employer by the IRS. Form 4070, Employee's Report of Tips to Employer, may be used to report the total tips on a monthly or other period to the employer.

The burden of reporting is the responsibility of both employee and employer. The type and form in which the tip is received controls who is responsible. For example, if a tip is received directly by the employee in cash, the employee must report the amount to the employer; if a tip is received by charge to a credit card, the employer is responsible for reporting this income in addition to amounts reported by the employee.

The monthly reporting of tip income by the employer is due by the tenth day of the month following the month in which the tip income was received, under Secs. 6053(a) and 3121(a) or 3231(e), unless reasonable cause is shown. Penalties for failure to report are severe; the employee shall pay an amount equal to 50% of the tax due, in addition to the tax imposed by Sec. 3101 or 3201, with respect to the amount of tips not reported.

Employers should notify employees that all tips are taxable income and that the reporting obligation of the employee is mandatory. In addition, the employee should be made aware of the severe penalties if the report is not furnished on a timely basis. An employer must keep records sufficient to substantiate any information returns, employer statements to employees, or tip allocations for a period of three years after due date of the respective return or statement to which they pertain.

Sec. 6053.3 requires that Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips, be filed by every large food or beverage establishment (defined in a subsequent paragraph) for each calendar year. Establishments filing more than one Form 8027 must include the transmittal Form 8027T with the return. These returns are due on or before the last day of February following the end of the calendar year and require:

* Employer's name, address, and tax identification number;

* Establishment's name, address, and identification number;

* Aggregate gross receipts of the establishment from the sale of food and beverage, exclusive of nonallocable receipts.

* Aggregate amount of charge receipts on which there were charged tips, exclusive of nonallocable receipts.

* Aggregate amount of charged tips shown on charge receipts;

* Aggregate amount of tips actually received by employees and reported to employer; and

* Name and social security number of each employee to whom an allocation of tips was made.

ALLOCATION OF TIP INCOME

The minimum aggregate amount the employer is required to report as tip income of employees generally is 8% of food and beverage receipts. If the aggregate amount of tips reported for any payroll period or calendar year is less than 8%, employers who qualify as large establishments must allocate the difference among tipped employees on either a "good faith" agreement, or on the allocation methods prescribed in Sec. 6053.3. See Exhibit 1 for an example illustrating the allocation of tip income.

A good faith agreement is a written agreement between the employer and at least two-thirds of the tipped employees of each occupational category (i.e., busboys and waiters). Such agreements describe the manner in which any allocated tips are to be attributed to employees. If a good faith agreement allocation is used, a copy must be attached to Form 8027.

However, the 8% allocation requirement can be reduced by filing a petition with the IRS District Director. The petition may be filed by the employer or a majority of the employees and indicate the actual amount of tips received to determine the perecentage of the establishment's gross receipts to be deemed as tips. The percentage

may not be reduced below 2% of gross receipts.

Studies have indicated that most patrons tip between 10% and 20% of food and beverage total. Congress has allowed for customers dissatisfied with the serviceprovided, who may tip less than customary, and for those who may not tip at all, to arrive at the 8% average.

Generally, employees are also paid an hourly wage in addition to their tips. Employers are permitted to take a 45% tip credit into account in paying the minimum wage. On April 1, 1991, the credit will be increased to 50%; under current law, the minimum wage is $3.80 per hour.

LARGE FOOD OR BEVERAGE

ESTABLISHMENT

A large food or beverage establishment is defined as any trade or business that provides food or beverages, with respect to which tipping by customers of employees serving food or beverages is customary, and which during the preceding calendar year normally employed more than 10 employees or equivalent (80 employee hours) on a typical business day, exclusive of 50% or more shareholders.

In general, the employer of a large food or beverage establishment shall, during any payroll period, allocate among serving employees who customarily receive tip income, an amount equal to the excess of:

* 8% of gross receipts of such establishment for the payroll period, other than nonallocable receipts such as carryout sales or services to which a service charge of 10% or more is added, over;

* The aggregate amount reported by such employees to the employer for such period.

TAX WITHHOLDING ON TIP

INCOME

As noted, tips received by an employee are considered wages and are subject to federal income tax withholding. Non-cash tips (i.e., tickets and other goods) and tips of less than $20 in any calendar month are excluded and not subject to withholding taxes.

An employer is responsible for remitting tax to the IRS on reported tips only to the extent sufficient wages of the employee are under the employer's control from which to deduct the tax, or funds are received from the employee for paying the deduction. Form 941, Employer's Quarterly Federal Tax Return, is used by an employer to report to the IRS the total amount both of wages and tips and of taxes withheld.

PRIORITIES FOR COLLECTING

TIP TAX FROM WAGES

Withholdings from wages under the employer's control are to be aplied toward previously uncollected federal income taxes on tip income in the following order:

1. Employee's portion of FICA on wage payments;

2. Federal Income tax to be withheld from wage payments;

3. Employee's portion of FICA tax on tip income;

4. Federal income tax to be withheld from tip income;

See Exhibit 2 for an example of this application.

STATEMENTS ON

UNCOLLECTED TAX

Employers must furnish their employees with a statement indicating the amount of FICA tax due on allocated tips that exceeds the amount the employer was able to withhold. The excess must be reported on Form W-2 and the employee must report the income on his or her individual income tax return (Form 1040) and pay the uncollected tax (both income tax and FICA), even if he or she would not otherwise be required to file a return.

Employers are not required to withhold income and FICA taxes on tips that are allocated. Employers are required to withhold only on tips that are reported by their employees. Allocated tip income is shown on Form W-2 as a separate item.

The IRS now considers the employer responsible for informing employees on what their tip income should be as well as any uncollected tax on tip income. The IRS has determined that the burden of reporting must be on the employer to achieve success in collecting taxes on tip income.

SUMMARY

One diffuculty in this area is that the standard 8% rate is used for minimum tip reporting and allocation. In practice, the IRS adjusts these rates according to local statistics and demographics. Practitioners should be alert to the reporting requirements so that clients may be aware of potential liabilities.

Enforcement of these guidelines for reporting of tip income is difficult without the absolute cooperation of employers. The burden of reporting responsibility and control has shifted more towards the employer under present regulations. Every employer must be aware of the difference between tip income and a service charge, and the reporting requirements to the IRS and to employees.

Kadir R. Karabay, CPA, is a Partner of Karabay and Tempesta, New York, NY. Mr. Karabay is a member of the AICPA, NYSSCPA, and Committees on Hotel, Club, and Restaurant Accounting and on Closely Held and S Corporations.

Steven Zanon, CPA, is a Manager in the accounting and business advisory services department of Laventhol & Horwath. Mr. Zanon is a member of the AICPA, NYSSCPA, and the Committee on Hotel, Club, and Restaurant Accounting.




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