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.

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Information reporting will begin to apply to 2011 transactions. Form 1099-K has been proposed for this purpose and is now available in draft form. Form 1099-K will be prepared for each calendar year and report the gross amount of transactions for the year and for each month of the year. The inclusion of monthly amounts on the return filed with the IRS and the copy furnished to the payee will help fiscal-year payees reconcile payment card and third-party network transaction receipts.

The gross amount of a transaction is not reduced by fees, charge backs, refunds, or any other amount. The IRS will use the reports as it does W-2s and 1099s. A company reporting gross receipts different from those in these reports can be subjected to auditing to explain the differences.

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These include:

• Payments to corporations would require a 1099 when they exceed $600 annually.

• Independent contractors would be subject to withholding if they do not provide a valid TIN—i.e., employers would have to verify TINs.

• Landlords would have to file 1099s on payments to service providers such as plumbers and carpenters.

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1. Electronically “paperclip” your documents to QuickBooks transactions to stay organized with QuickBooks Document Management. Save time by managing your client documents directly in QuickBooks. Organize receipts, contracts, statements and more by attaching electronic or scanned files to any customer, vendor, employee, account, or transaction. Scanner is not included.
   • Store receipts, statements and more online (in the internet cloud) for easy sharing
   • Easily attach documents to any customer, vendor, employee, account or transaction
   • Scan dozens of documents at one time — simply insert blank pages in between and QuickBooks creates individual files
   • Keep important documents at your fingertips and backed-up online
   • Streamline collecting and matching documents from clients to specific transaction
2. Entering large amounts of List data is now as simple a copy and pasting with the new Add/Edit Multiple List Entries feature. Quickly enter or edit multiple Items, Customers, and Vendors so you can make changes faster and more efficiently than ever.
   • Enter Items, Customers, or Vendors data using an improved table format
   • Copy and paste lists from Microsoft Excel into QuickBooks lists
   • Edit one list entry then easily copy the changes to many
3. Spend less time hunting for the right report with the improved Report Center. Quickly scroll through full-size sample reports to make sure you get the right information before running a report. No more looking at tiny thumbnails.
   • Use the search box to find reports using plain English
   • View recently-run reports — QuickBooks even remembers your custom settings
   • Get a shortcut to reports you use most by creating “favorites”

Call us today for your QuickBooks needs.

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EITC refunds are based on family size and income. For 2009:

• Families that earned less than $48,279 and have three or more children may qualify for a tax credit up to $5,657
• Families with two children and income less than $45,295, may qualify for a tax credit up to $5,028
• Families with one child and an income less than $40,463 may qualify for a tax credit up to $3,043
• Families with no children and earning less than $18,440, may qualify for a tax credit up to $457

More information about the EITC, printable materials for businesses and community organizations to distribute can be found on the Comptroller’s Web site at http://www.window.state.tx.us/taxinfo/eitc/.

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What does this mean for you as an employer? Many other states facing their own budget issues could end reciprocity agreements in the belief of generating more income. If you have nonresident employees working in any state, no matter how inconsequential the amount of time they spend in that state, watch for new nonresident SIT withholding and filing obligations by monitoring state Web sites in states where your employees work and in states where employees live. Many states are auditing firms that fail to withhold nonresident SIT, and liabilities and penalties can be substantial.

According to the Federation of Tax Administrators’ website, only seven states have no state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. New Hampshire and Tennessee only tax dividends and interest income.

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Just put it to sleep

Back in the “olden” days of computers, say around the turn of the century, the most likely time for your computer system to fail was around the moment you hit the power button to turn it on. The very act of turning on your computer put a strain on the memory, the processor, the hard drives and most of the other components in your system. In those days, the best was to avoid the possible repercussions of power surges during power on were to just let the system run. You’d turn off your monitor and peripherals and only turn off the system itself when necessary.

Computers have come a long way in the last decade. Prices are down and manufacturers can’t afford to sell computers that fail. And, advances in “Energy Star” technology has significantly decreased the number of watts it takes to run your PC and peripherals. With newer systems, according to the Microsoft Small Business Center’s article “Do You Need to Shut Off Your PC at Night?,” there is no reason to shut down your computer overnight. In fact, you may save as much as $90 a year in energy costs if you place your computer into the “hibernate” or “sleep” mode instead of turning it off or letting it run in normal operations mode.

Even when it’s shut down, you computer still uses electricity.  Putting your system into “hibernate” or “sleep” mode will save just as much energy as shutting it down.

Using a screen saver doesn’t save electricity. Having the monitor turn off after a period of time will.

Turning your computer on and off isn’t going to wear it out.  Newer systems are capable of handling  some 40,000 on/off cycles. The biggest advantage to “sleep” or “hibernate” modes is the time you save over having to go through the Windows boot cycle.

You can modify the power savings settings on your computer and set them to automatically enter  “hibernate” or “sleep Mode” after a specified period of idle time. Many computers also have a keyboard button that will put your computer into a “hibernate” or “sleep” mode when pressed.

If your computer is not currently set to automatically conserve energy, check Windows Help and search for “power”, “hibernate,” or “sleep.”

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Might be time for an upgrade

The short answer is three years and applies to any computer you own or use.

The longer answer is…well…longer. These days computers are becoming more like automobiles and television sets. They tend to last longer. A decent PC can last for years. Mostly gone are the days of bad memory, fried hard drives, on/off switches that break and other ailments that were common in the dawn of the PC age. Computer technology is still advancing at a rate that is so fast that your new PC is essentially obsolete by the time you purchase it.

Couple that with the fact that operating systems and business applications are constantly being upgraded and expanded (not to mention your favorite games and entertainment software) and sooner or later the system you have now just isn’t going to handle the load.

If your computer is more than three years old, it’s very likely running slower than when you first purchased it. The problem is not that the computer has slowed down, it is that all the software that you are using and been upgrading now requires more memory and resources in order to run effectively. It’s that updated Windows you installed along with the updated antivirus software and the latest Microsoft Office and all those new widgets and gadgets that are really cool but take up even more system resources than they did when you got the computer just three years ago.

As your computer gets older you end up spending more time making things work properly and end up spending more money for enhancements. You could spend $150 to add more memory to your computer and $100 to upgrade your hard drive. If you do both, you’ve spent $250. You can buy a new faster computer with the memory and hard drive space that you need for around $400. Now you’ll have a computer with more memory, more drive space AND a faster processor.

Also note, that according to Hewlett Packard, a new computer will run three times faster and use half the electricity and is more environmentally friendly than your old computer.  You can see the HP statistics at:

http://www.hp.com/united-states/windows7/small-medium-business.html?dimid=116247560

and read more about energy savings from Mr. Electricity at:

http://michaelbluejay.com/electricity/computers.html

It’s a good bet that while your new computer is going to cost you around $1 per day, that same system is likely to save you about 50 cents per day in electricity along with another 50 cents per day in efficiency. Essentially, your new computer is FREE.

If your computer has a problem and it’s over 3 years old, it’s time to get rid of it. If your computer has a problem and is less than 3 years old, you should look at the cost of repair before replacing it.

If your computer is 5 years old running just fine and runs the software that you need it to run then follow the old adage, “if it ain’t broke, don’t fix it.”

If you have an older computer that is running slow and has room for more RAM memory, then you can add extra memory for about a $100. That extra memory can speed up your computer significantly.

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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!

Even if it is January already, you should review and reconcile your company records. Certainly this should happen before you send your information to your CPA to prepare your taxes.   Review both your Balance Sheet and your Income Statement for errors.

The Balance Sheet is an accounting of the company’s financial history.  It includes accounts such as bank accounts, accounts receivable, fixed assets, inventory, accounts payable, payroll tax liabilities, notes payable, and equity accounts.  The Profit and Loss Statement is an accounting of income and expenses for a specific period, i.e. this month, last month, this year, last year.

All the accounts on the Balance Sheet should be reviewed. Your list should include:

• Bank accounts are reconciled and correct
• Accounts receivable ledger is correct
• Fixed asset list is current
• If applicable, do a physical inventory at the end of the year
• Accounts payable ledger is correct
• Payroll tax liabilities are current and correct
• If applicable, sales tax payable balance is correct
• Notes payable balances are correct

Review the Profit and Loss statement:

• Income is properly classified
• Expenses are properly classified
• Prepaid expenses handled correctly

You are the person who knows your business best.  Do what I call the “smell test.”  Does anything seem out of line or out of place?  It is much easier and much less costly to correct mistakes now than to file amended tax returns later.

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The separation of business and personal expenses should be absolute. Do not commingle funds or expenses. Your small business, even a sole proprietorship, should have a checking account. If you do not have a business credit card, then have two personal credit cards and use one solely for business and the other solely for personal expenses.

Income and Deductions

A deduction is an ordinary and necessary business expense. Business deductions are more than just rent and utilities. Make sure you are accounting properly for all income and expenses.

Some common mistakes are:

• Job expenses classified as overhead expenses or vice versa
• Prepaid expenses not accrued
• Gift card sales and customer deposits recorded as income

Bookkeeping

YOU should review your company records. Certainly this should happen before you send your information to your CPA to prepare your taxes, but there are also many things that you should also review at least monthly.  These include, but are not limited to:

• Reconciliation of bank statements
• Payroll tax payments
• Sales tax reports and payments
• Accounts receivable aging and collections
• Accounts payable aging and payments

Keep Records

Require receipts in order to be reimbursed for company expenses. Make it a company policy – no receipt, no reimbursement. Include yourself in the policy. Generally records should be kept for seven years, but some records should be kept permanently.  See our Records Retention Schedule under the Resources section.

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