Page 20 - IRS Employer Tax Guide

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You can collect these taxes from the employee's wages The tips may be allocated by one of three meth-
(excluding tips) or from other funds he or she makes avail- ods—hours worked, gross receipts, or good faith agree-
able. See Tips are treated as supplemental wages in sec- ment. For information about these allocation methods, in-
tion 7 for more information. Stop collecting the employee cluding the requirement to file Forms 8027 electronically if
social security tax when his or her wages and tips for tax 250 or more forms are filed in calendar year 2020, see the
year 2020 reach $137,700; collect the income and em- Instructions for Form 8027. For information on filing Form
ployee Medicare taxes for the whole year on all wages 8027 electronically with the IRS, see Pub. 1239.
and tips. You’re responsible for the employer social secur-
ity tax on wages and tips until the wages (including tips) Tip Rate Determination and Education Program. Em-
reach the limit. You’re responsible for the employer Medi- ployers may participate in the Tip Rate Determination and
care tax for the whole year on all wages and tips. Tips are Education Program. The program primarily consists of two
considered to be paid at the time the employee reports voluntary agreements developed to improve tip income
them to you. Deposit taxes on tips based on your deposit reporting by helping taxpayers to understand and meet
schedule as described in section 11. File Form 941 or their tip reporting responsibilities. The two agreements are
Form 944 to report withholding and employment taxes on the Tip Rate Determination Agreement (TRDA) and the
tips. Tip Reporting Alternative Commitment (TRAC). A tip
Ordering rule. If, by the 10th of the month after the agreement, the Gaming Industry Tip Compliance Agree-
ment (GITCA), is available for the gaming (casino) indus-
month for which you received an employee's report on try. For more information, see Pub. 3144.
tips, you don't have enough employee funds available to
deduct the employee tax, you no longer have to collect it. More information. Advise your employees to see Pub.
If there aren't enough funds available, withhold taxes in 531 or use the IRS Interactive Tax Assistant at IRS.gov/
the following order. TipIncome for help in determining if their tip income is tax-
1. Withhold on regular wages and other compensation. able and for information about how to report tip income.
2. Withhold social security and Medicare taxes on tips.
3. Withhold income tax on tips. 7. Supplemental Wages

Reporting tips. Report tips and any collected and un- Supplemental wages are wage payments to an employee
collected social security and Medicare taxes on Form W-2 that aren't regular wages. They include, but aren't limited
and on Form 941, lines 5b, 5c, and, if applicable, 5d to, bonuses, commissions, overtime pay, payments for
(Form 944, lines 4b, 4c, and, if applicable, 4d). Report a accumulated sick leave, severance pay, awards, prizes,
negative adjustment on Form 941, line 9 (Form 944, back pay, reported tips, retroactive pay increases, and
line 6), for the uncollected social security and Medicare payments for nondeductible moving expenses. However,
taxes. Enter the amount of uncollected social security tax employers have the option to treat overtime pay and tips
and Medicare tax on Form W-2, box 12, with codes “A” as regular wages instead of supplemental wages. Other
and “B.” Don't include any uncollected Additional Medi- payments subject to the supplemental wage rules include
care Tax in box 12 of Form W-2. For additional informa- taxable fringe benefits and expense allowances paid un-
tion on reporting tips, see section 13 and the General In- der a nonaccountable plan. How you withhold on supple-
structions for Forms W-2 and W-3. mental wages depends on whether the supplemental pay-
Revenue Ruling 2012-18 provides guidance for em- ment is identified as a separate payment from regular
ployers regarding social security and Medicare taxes im- wages. See Regulations section 31.3402(g)-1 for addi-
posed on tips, including information on the reporting of the tional guidance. Also see Revenue Ruling 2008-29,
employer share of social security and Medicare taxes un- 2008-24 I.R.B. 1149, available at IRS.gov/irb/
der section 3121(q), the difference between tips and serv- 2008-24_IRB#RR-2008-29.
ice charges, and the section 45B credit. See Revenue
Ruling 2012-18, 2012-26 I.R.B. 1032, available at Withholding on supplemental wages when an em-
IRS.gov/irb/2012-26_IRB#RR-2012-18. ployee receives more than $1 million of supplemen-
tal wages from you during the calendar year. Special
FUTA tax on tips. If an employee reports to you in writ- rules apply to the extent supplemental wages paid to any
ing $20 or more of tips in a month, the tips are also subject one employee during the calendar year exceed $1 million.
to FUTA tax. If a supplemental wage payment, together with other sup-

Allocated tips. If you operate a large food or beverage plemental wage payments made to the employee during
the calendar year, exceeds $1 million, the excess is sub-
establishment, you must report allocated tips under cer- ject to withholding at 37% (or the highest rate of income
tain circumstances. However, don't withhold income, so- tax for the year). Withhold using the 37% rate without re-
cial security, or Medicare taxes on allocated tips. gard to the employee's Form W-4. In determining supple-
A large food or beverage establishment is one that pro- mental wages paid to the employee during the year, in-
vides food or beverages for consumption on the premises, clude payments from all businesses under common
where tipping is customary, and where there were nor- control. For more information, see Treasury Decision
mally more than 10 employees on a typical business day
during the preceding year.

Publication 15 (2020) Page 19