Tips are an important part of many types of businesses. Reporting and handling tips correctly is crucial.
Tips and payroll entry
When entering or reporting tips, watch the kind of tips being reported.
In Evolution, the Declared Tips option corresponds to cash tips, or tips already given to the employee that should not be paid out again during payroll.
Charge Tips (Net) is the type of tips that are added to bills when processing credit cards typically. Any type of tip that should be paid out to the employee because they have not already received the amount would fall in to this category.
In some cases there may be automatic gratuity added, which can be reported or entered separately from the other two, if desired.
Tips and Taxes
The main purpose for reporting tips is for taxes. For Charge Tips, the amount is taxed as normal. The tips are included as regular wages and taxes are withheld from the amount. The net pay is the amount left after taxes.
For Declared Tips, the amount of the tips has already been provided to the employee. The taxes are then removed from the employee's regular wages. If the amount of tips is significant, this can result in a zero net check, or no actual take home pay for the employee for the pay period. If there is insufficient regular wages to withhold all of the taxes required for the tips reported, it can create a shortfall, or more taxes owed than the current period can cover. We track shortfalls and attempt to make up taxes owed on future checks.
The tips are reported on the Form 941 or Form 944 as well as the tax amounts collected and uncollected. At year end, the W-2 form also reports the tips and taxes collected and uncollected.
For further information on IRS rules regarding Tipped wages