Home Taxation Common Tax Issues for the Service Industry

Common Tax Issues for the Service Industry

by Jackson B

Earning an income in your current job is easy if you know what to do and how to do it. You have a basic legal right to an income for you and your family. In order to qualify as an employee for benefits, certain requirements must be met. An income is not necessarily taxable unless your sources of income are more than the amount that would be considered a taxable income in the eyes of the Internal Revenue Service. The following are some simple steps to help you increase your basic legal right to an income:

* If your tips every month are less than $20, they are no longer taxable income. In general, however, they are subject to Medicare and Social Security withholding. If you get more than $20 in social security wages, report that income to your supervisor. Your supervisor will also report your tipped income on your W-2, usually Box 7 (social security tips).

* If your tips consist of more than $20 per month, do not include them on your personal taxes. Those tips are only taxable if you earn more than half of the total amount of tips your employees usually make. For most salaried employees, the portion that comes from the total tips their servers take home is about eighty or ninety-five percent. If you have employees that get tips from other people and those tips are subject to social security withholding, those employees’ tips are not subject to income tax. However, you should still report those earnings on your personal taxes.

* Watch out for anyone who seems to be giving you strange tips. They might be trying to get you to itemize deductions you did not ask for, such as those for which you did not volunteer. Watch out for anyone who seems to be giving you strange amounts of information to help you avoid paying back taxes. For example, an employee might advise you to stop taking tip income into account when calculating your EIC tax liability. If you know that the tips your server takes home are subject to EIC reporting, don’t allow them to talk you into otherwise taxable deductions.

* Be suspicious of any form 8027 that you discover on your employees’ checks. The form is often filled out by the server, who gives it to you after each shift and does not include a receipt. However, if you discover the form on a check, read the paper carefully and look at the details very closely. Look carefully to see if you can figure out the type of service charge you’re being charged. For example, a service charge of ten dollars automatically forms part of your EIC on a monthly basis, but the service charge on a per-order basis could be deducted, resulting in back taxes.

* Tip reporting is a key part of keeping track of your income during tax season. If a server takes cash tips only, you may be subject to EIC reporting even if your employees do not receive tips directly from you. This is because tips are included in computing your EIC, and some tipped employees may receive more than their tips. Therefore, tips are subject to EIC reporting. If your server takes cash tips and deposits them in your bank, that amount will also be subject to EIC reporting.

* It’s a good idea to let your employer know about any significant changes in your financial situation. Let them know the total tips you’re receiving (and taking) and how much you’re being charged for those tips. Don’t wait until your quarterly or yearly reports come to find this out. Tell your employer immediately if your tips aren’t matching your bill. Most employers will match a tipped employee’s tips with his or her wages, and many provide for additional payments, such as a gratuity. Before you leave your job, be sure to get any agreements regarding such payments in writing.

As you can see, tips can be a very important tax matter. While they’re not considered “common tax law” like income and medical expenses, claiming them every year can have a significant tax impact on your financial situation. Knowing your rights can help you avoid costly penalties, and help you navigate the often complex world of income and EIC issues.