Tips

Client is a salon and stylists are paid via W2. Tips are paid in cash or via Venmo and Paypal directly to the stylist and the stylists are reporting them on their personal returns. The salon is not involved. From my understanding, these tips are to be reported to employer and the employer is to withhold taxes and include on the W2.

This will increases employer payroll taxes and the 401 K match, which the salon can't afford. One solution would be to decrease wages but the client says this isn't an option. Last year one of the stylists said he reported more tips on his return than he earned so it would look better to a lender.

Is there another option? Client's previous accountant didn't have an issue with this (and owner is a stylist), so maybe I'm missing something. If not, what are the options for keeping the stylists honest and not reporting higher tips? Also, there could be a reporting issue for the stylists, as tips could be reported on the W2 and a 1099-K. Plus, client is worried this will be a red flag to the IRS for prior years.

There are no options. The IRS has a publication devoted to tips. I'm amazed at the number of salon owners who claim they don't know what is required. A client of mine, who bought her employer's c corp salon just reported 8% of the sales. I didn't prepare the corp returns. Now that she is a sole proprietor, I gave her a spreadsheet with a column just for actual tips.

Honest means reporting actual tips.

Publication 1244 is for employees to report the daily tips.

Publication 531 is for employers.
Print both out and tell your client to read them.

Plus, client is worried this will be a red flag to the IRS for prior years.

It already is.

Going forward? Rent stations to the stylists.

As an aside, Florida is the only state that imposes sales tax on commercial leases. I'm appealing a sales tax imposed on a business that rents spaces to dog groomers for a percentage of the gross. The auditor recharacterized the owner's percentage as rent.

That's also how you just characterized it.

Thanks for the replies. Given that the previous accountant did the owner's personal and business return and thus, knowingly, reported the tips on the owner's personal return, it seemed like there was another option.

Renting the space to the stylists is a good idea but owner says most will leave if they convert or if wages are decreased.
Owner is considering reducing the company match of the 401K to help cover the added expense but that won't be enough.