We are often encouraged and inspired when we see news stories about people who leave huge tips for waitresses and waiters. Some are paying back – honoring the sacrifice they themselves had made early in life. Some are simply in appreciation for continued service over a long period of time, like a recent New York man who left $50,000 to each of two waitresses at his favorite diner.
Tips are a constant issue between business owners, wait staff and the IRS. Tip reporting can become an immediate issue for small business owners such as restauranteurs, when the IRS decides to step in and simply attribute tip income to a business and its employees when it doesn’t have the data to support it.
In the case above, amounts bequeathed are usually not taxable income. However, what happens when the estate tries to claim it as a deduction? The IRS finds a mis-match between the two and all heck breaks loose for both parties. Are we working on estate tax or income tax?
In the end, tip reporting can be quite complex, and affects a business persons liability across a broad spectrum of tax authorities including payroll tor income ax, social security tax and medicare tax. It’s not just the IRS that is carefully watching, the State of California’s taxation agencies are close behind.
If you have questions about business tax reporting, estate tax preparation or estate planning we invite you to contact Allen Barron for a free consultation at 866-631-3470. Tax and accounting requirements are quite complex. The legal and financial ramifications of getting it wrong have brought down too many small businesses. We want to help prevent that, and ensure that your business not only survives, but that it prospers.