Archive for the ‘Tax Articles’ Category

The IRS is working hard to find lost revenue.  Non-reported or under reported income by restaurant workers is under scrutiny. Restaurants owners have the critical tasks of keeping records on tips received and compelling employees to report tips.

All employees receiving $20.00 or more a month in tips must report 100% of their tips to their employer and are required to pay taxes on all their wages including tips.

From the Employers perspective here are the three basic things that you need to know if you employ tipped workers:

1. You are required to receive a tip report from each employee once a month. It must include the name of the employer, the employee’s name, address, social security number, the date of the report, period covered in the report and the report must be signed by the employee. In practice, you should receive a tip report for every payroll period, otherwise you cannot correctly report the employee’s total wages or accurately calculate taxes.
2. You need to withhold Income and FICA tax from each paycheck, report each employee’s tips to the IRS and pay your share of FICA tax. Employee tip information will also be included on your “Employers Quarterly Payroll Tax Return” (Form 941), “Wage and Tax Statement” (Form W2), “Employer’s Annual Federal Unemployment (FUTA) Tax Return” (form 940) and generally on your state income and unemployment reporting forms. In certain cases you may need to “allocate” additional wages for an employee if he or she has failed to report sufficient tip income.
3. You need to file IRS Form 8027 at the end of each year if your business is fits the IRS’s definition of a “large food or beverage establishment.”  Form 8027 summarizes the restaurants total sales, charged sales, charged tips and total reported tips.

A large food or beverage establishment is defined as one to which all of the following apply:

• Food or beverage is provided for consumption on the premises.
• Tipping is a customary practice.
• More than 10 employees who work more than 80 hours were normally employed on a typical business day during the preceding calendar year.

How to determine whether to File Form 8027 (IRS requirements for 2009)

Complete the information below to determine if you had more than 10 employees on a typical business day during 2008 and, therefore, must file Form 8027 for 2009. The filing requirement (more than 10 employees) is based on the total of all employees who provided services in connection with the provision of food and beverages at the establishment, not just the number of directly tipped employees. Include employees such as wait staff, bussers, bartenders, seat persons, wine stewards, cooks, and kitchen help.  It is the average number of employee hours worked on a typical business day that determines whether or not you employed more than 10 employees.

1. Enter one-half of the total employee hours worked during the month in 2008 with the greatest aggregate gross receipts from food and beverages
2. Enter the number of days opened for business during the month shown in line 1
3. Enter one-half of the total employee hours worked during the month in 2008 with the least aggregate
4. Enter the number of days opened for business during the month shown in line 3
5. Divide line 1 by line 2
6. Divide line 3 by line 4
7. Add lines 5 and 6. If line 7 is greater than 80 (hours), you must file Form 8027 for 2009

A person who owns 50% or more in value of the stock of a corporation that runs the establishment is not considered an employee when determining whether the establishment normally employs more than 10 individuals.

Pit Falls

Form 8027 is organized in such a way as to highlight any shortfall of reported tips below 8% of gross receipts from food and beverage sales. Don’t be misled by the 8% figure. Just because this is the “threshold” number that the form uses to require you to allocate additional tip income does not mean that this is all you need to report to be safe from an IRS audit. The law requires your employees to report 100% of tip income and the 8% threshold is only one way that the IRS monitors compliance in reporting restaurants. This line item is red flag to the IRS indicating that your employees may not be reporting all their tips. In fact, if your total reported tips are less than 8% of total food and beverage sales, then you must allocate additional tip income to the W2 of every tipped employee that reported less than 8% of their respective sales, so that their total reported income reflects this minimum 8% allocation.

Tip Allocation

There are three methods of allocating additional employee tips: hours worked, gross receipts, or a good faith agreement.

The Hours Worked method applies only to restaurants which employ fewer than 25 full time employees during a payroll period, and it allocates any tip shortfall (below 8% of total sales) by spreading it among under reporting servers based on their percentage of total hours worked as compared to all the other servers. This method is the least accurate as it does not take into account the fact that servers work shifts with different tipping patterns.

The Gross Receipts method can be used by any restaurant and usually results in a more accurate and fair allocation. It determines the amount that each server should have reported in tips to reach the 8% minimum threshold by comparing the server’s gross receipts as a percentage of the total restaurant receipts. If the server’s actual reported tips are less than the percentage calculated as above then a prorate portion of the total shortfall is allocated to that employees W2.

The Good Faith Agreement method is rarely used.

For a detailed explanation of each method go to: http://www.irs.gov/pub/irs-pdf/i8027.pdf.

Proposed IRS regulations address reporting requirements for credit card and third-party network transactions (IR-2009-106; NPRM REG-139255-08). The IRS plans to require credit card and other firms that process transactions to report the annual gross network transactions to participating merchants and to the IRS.

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According to Texas Comptroller Susan Combs a slow economy means more Texas families may qualify to claim the Earned Income Tax Credit (EITC) on their federal income tax. Read the rest of this article »

Facing huge budget deficits, Minnesota and Wisconsin have ended their reciprocity agreement regarding state income tax as of January 1, 2010. Now employers in those states will be required to withhold not only the work state SIT but, to the extent that resident SIT withholding exceeds the nonresident tax, SIT for the resident state. Residents of either state who work in the other will be required to file SIT returns in—and pay taxes to—both states. Read the rest of this article »

It's that time again

Did the last quarter of the year go by before you knew it?  That is when you should have been reviewing your records in preparation for the year-end. Once Halloween hits it seems like Thanksgiving is on us before we can catch a breath. Employees want to take time off for family functions, vacations, shopping, etc. Productivity is not at its peak. Before you can blink, it’s Christmas and the END OF THE YEAR!

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More and more individuals are working as freelancers and independent contractors these days—and the IRS is not particularly happy with that.

The problem is that it is sometimes difficult to determine whether an individual is an employee or an independent contractor—and this can lead to disputes with the IRS. Regardless of what label you put on a relationship, the key issue as far as taxes are concerned is control—the more control a company has over the work, the greater the chance the worker should be classified as an employee instead of an independent contractor.

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The 81^st Legislature made significant changes to Texas tax laws.

The changes include the following:

• a new exemption from state and local sales and use taxes for certain school supplies during the annual August Sales Tax Holiday
• revisions to the collection and allocation of local sales and use taxes
• a new exemption for crude oil and natural gas taxes
• a new method for calculating the tax on tobacco products other than cigars
• a revised payment process for losses covered by the Texas Windstorm Insurance Association
• a revision to the motor vehicle orthopedic handicap exemption
• a new Prepaid 9-1-1 Emergency Service Fee

For more information about these changes to Texas tax laws and how they may affect you, please see the Legislative Update at www.window.state.tx.us/taxinfo/taxpubs/st_update.html

Is Physical Presence Still the Standard?

Calculating sales tax. What's the standard?

For years, businesses have had the false confidence that if they don’t have an office in another state, they are not subject to that state’s excise and sales taxes, but as states become more desperate to close growing deficits, they are expanding the definition of “nexus” or “contacts”—i.e., your company’s presence in the state.

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A new deduction for qualifying motor vehicles taxes.

The recently enacted American Recovery and Reinvestment Tax Act of 2009 (P.L. 111-5) provides a new deduction for qualifying motor vehicles taxes.

1. Who can claim the deduction for motor vehicle taxes?

The Recovery Act makes the deduction available to purchasers of “qualified motor vehicles” after February 18, 2009, and before January 1, 2010 [IRC Sec. 164(a)(6) and Sec. 164(b)(6)(G)]. A qualified motor vehicle is a new passenger vehicle, light truck, or motorcycle that has a gross vehicle weight rating of 8,500 pounds or less, or a motor home of any gross vehicle weight [IRC Sec. 164(b)(6)(D)(i)].

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