Don't Mess With Taxes

Black's, an iconic Central Texas barbecue chain, was caught improperly distributing tip money to managers, instead of the 270 employees to whom it should have been paid. Those restaurant workers now have their proper gratuities, which are taxable income.

Being a restauranteur has always been a challenge. The same can be said for eatery staff. Then along came the COVID-19 pandemic, amped up the workplace issues both owners and employees face.

So what else could complicate things? Tips.

In one famed Central Texas BBQ joint, it was the way tips were collected and distributed among workers.

The U.S. Department of Labor (DoL) announced this week, that Black's Barbecue, which has locations in Austin, New Braunfels, Lockhart, and San Marcos, violated a tip sharing law.

DoL Wage and Hour Division investigators said the restaurants improperly reallocated $230,353 in tips meant for servers. The money instead was divided among managers, reducing the earnings of more than 270 employees.

That was in violation of the federal labor law that prohibits employers from keeping workers' pooled tips. The gratuities must be distributed to the staff.

A spokesman for the restaurant's ownership group told the Austin American-Statesman that Black's outsourced its payroll. He also told the newspaper that he was unaware of the Labor Department's final rule, Tip Regulations Under the Fair Labor Standards Act (FLSA), issued on Dec. 30, 2020. The relevant provision, that managers should not take tips, took effect on April 30, 2021.

Money given back to staff: I'll leave it to the restaurant group and the DoL to sort out the final details of the misallocated tips. But the main issue has been resolved.

The Labor Department says the improperly shared tips have been repaid to the previously stiffed servers.

"Food service industry employers must know that tips are the property of tipped employees who earn them, plain and simple," said Wage and Hour Division District Director Nicole Sellers in Austin, Texas. "Workers and their families depend on their rightfully earned wages and benefits. If you take from them, you take from their families. The Wage and Hour Division is committed to safeguarding the rights of all essential food service workers."

Tip violations common: The DoL has plenty of work in this area to keep its detectives busy. In fiscal year 2021, the Wage and Hour Division identified nearly $35 million in back wages owed to more than 29,000 food service industry workers.

The Division says that in its food service investigations, it commonly finds violations related to employers retaining tips, failing to pay overtime when required, and not paying for pre- and post-shift work.

Those violations also are expected to increase. The Bureau of Labor Statistics projects that food preparation and service occupations will grow 20 percent from 2020 to 2030, much faster than the average for all occupations. That comes to about 2.3 million new jobs.

One possible economic reason for this growth is that these occupations tend to be among the nation's lowest paid. It also might explain why so many restaurants are struggling to find staff as they re-open post-pandemic.

Tips are taxable: Now about that recovered tip money. Another federal agency now has an interest in it.

Yep, we're talking the Internal Revenue Service.

By now, most people who regularly get tips as part of their earnings know that the money, whether handed out by a boss as part of a tip pooling arrangement or pocketed directly, is taxable income. They're also subject to Federal Insurance Contribution Act (FICA) taxes that go toward Social Security and Medicare.

The IRS says tips include —

• Cash tips received directly from customers.
• Tips from customers who leave a tip through electronic settlement or payment. This includes a credit card, debit card, gift card, or any other electronic payment method.
• The value of any noncash tips, such as tickets or other items of value.
• Tip amounts received from other employees that are paid out through tip pools, tip splitting, or other formal/informal tip sharing arrangement.

If you receive a total of $20 or more in tips in a month, that amount must be reported to your employer. In order to accurately comply with this requirement, you should keep a daily tip record.

As noted in the monthly tax moves over in the ol' blog's right column, this required tip reporting is on the 10th of each month. If the 10th falls on a weekend or holiday, then you can give your boss your tip amount report on the next business day.

See more tax forms and more about them at Talking Tax Forms.

That monthly tax move also notes the IRS suggestion that you use Form 4070A, Employee's Daily Record of Tips, an excerpt of which is shown above. The form is part of IRS Publication 1244, Employee's Daily Record of Tips and Report of Tips to Employer, to track your tips.

If you prefer, you can use your own tip tracking method. Just make sure it includes:

• Employee signature,
• Employee's name, address, and social security number,
• Employer's name and address (establishment name if different),
• Month or period the report covers, and
• Total of tips received during the month or period.

These tips amounts reported to your employer then will be included on the W-2 wage and tax statement you'll get at the start of the next year.

The tax implications of employer reported tips will show up in the W-2's Box 1 (Wages, tips, other compensation), Box 5 (Medicare wages and tips), and Box 7 (Social Security tips) of the employee's Form W-2, Wage and Tax Statement.

Unreported tips at filing time: What about the month's when you didn't get $20 or more in tips and didn't report the amount to your boss? They will be accounted for at tax return filing time by tallying them on IRS Form 4137, an excerpt of which is shown below.

See more tax forms and more about them at Talking Tax Forms.

Form 4137, as its name says, is where you calculate the Social Security and Medicare tax due on your unreported tip income.

That's why you need to keep track of all your tips, even those amounts that you don't have to report to your employer. Your good record keeping will make complete and correct filing much easier.

You can read more about employees and employer tax responsibilities when it comes to tips at IRS.gov's Tip Recordkeeping & Reporting online page, as well as in the IRS' tax topic on tip withholding and reporting.

And if you think you might be owed back wages, either because you didn't get all your rightful tips from an employer or other reasons, check out the DoL's online search tool. If you're in the database of owed workers, it will walk you through the online process of claiming that unpaid money.

You also might find these items of interest:

• Holiday tipping and a tax tip for recipients
• Tip income trips up Yankees' traveling secretary
• Lucrative loos' change leads to toilet tips tax evasion charges
• DoorDash et al apparently aren't collecting sales tax on delivery and service fees

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