Bordeaux & Bordeaux CPAs is a Supplier Member of CCSA (Contemporary Ceramic Studios Association) which is an organization representing paint your own pottery studios (PYOP) and ceramic arts businesses. Donna Bordeaux, CPA provided the webinar to CCSA association members as a benefit of their membership in the organization. Their CPA firm specializes in growing PYOP studios with industry-specific key performance indicators by helping them grow their studios and minimize the impact of taxes.
Good morning CCSA. I have had several people ask me about tip reporting. I know there were some classes regarding incentives to retain employees and I wanted to address the issue because it seemed like a pretty common question. First off, tip reporting is not a bad or a good idea. One or the other you just have to know what you’re deciding to do and make a good decision before you start if you start.
First off you need to know about the tax implications. Payroll taxes will apply to tips for both the employee and the employer. Let’s take it one at a time, from the employer side the employer must impute those additional wages called tips into the payroll. The payroll would have to be at least updated on a monthly basis per the IRS code. You’d have to pay social security taxes on that and also any state unemployment or federal unemployment on those wages. Figure on roughly 8% to 10% in addition for paying the taxes on the tips.
Secondly from the employee perspective, they have to pay social security and Medicare as well. They’re also going to have to pay federal and state withholding on those. You’re employees will probably see a 10% to 12%, maybe 15% depending on their tax bracket, increase in their taxes because of the tips. Just a rough guesstimation, if somebody got $100 worth of tips throughout the month, that would cost the employer about $8 to $10 and the employee probably about $10 to $15 on those tips.
You do have some additional reporting requirements per the IRS as well. You’re going to need to track the tips. Now here’s another thing you need to be aware of if you’re processing through merchant services, how are you going to tell whose tips are whose? Also you’re going to have to be able to track cash tips as well as the merchant services. You’re going to have to depend on your employees to report this to you at least on a monthly basis. You’ll want to have it in writing signed by the employee to protect you. Those will need to go into the payroll as well, again at least on a monthly basis.
You’ll also need some rules about how you’re going to pay out the tips. Whether you pay them out at the time that the tip is received or along with the payroll. What you really don’t want to have is dipping into the drawer for cash tips, sticky fingers gets crazy over a little period of time and it makes people pretty lazy about taking cash out of the drawer and you really don’t want that, you want to maintain a strict control over that.
You also want to talk about the process for how you determine whose tip it is. If multiple people help a customer in the studio what are you going to do with that situation? If it’s a party and somebody who’s working in the party switches out midway through or there’s multiple people working that party, how will you determine whose tip it is? I have seen situations where people do the whole studio puts all the tips into a jar and then there’s a sharing mechanism somehow. That is fine too but you do have to watch that somebody doesn’t accept that cash tip at a party or something and just put in your pocket, you may create more employee loyalty problems than you resolve in that situation.
Give this a lot of thought before you implement and make sure that you have a good set of rules. I know the Cates’ do to tipping piece, so ask them how they handle a lot of those types of situations that you may come upon so that you can make sure that you have a great result from the tips and it actually achieves what you’re trying to do and help you retain the employees.
I hope this helps you. Also one other thing, make sure that policy’s written and not just a verbal policy, that leads to confusion as well. You can even have your employees help you draft it or help you decide the rules at the end of the day if you want to go with a more of a group effect. Hope that helps describe how you can use tips to your advantage or what you need to know to make sure you’re aware of all the situation. Have a great day. I’m Donna Bordeaux. Thanks. Bye bye.