Simple "Tips" Question

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#1
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Hello - I'm an EA, not a CPA, and a client is debating with me.....

Are tips (that qualify as spur of-the-moment NOT added to bill) included in the gross receipts on the P&L and thus on the tax return?

These are tips collected through the credit card merchant.

The client owns a restaurant.

I thought that they were not to be included as gross receipts and that they are thus not an expense either when given to the employee (the payroll TIPS are treated as some sort of credit/debit that makes it a balance sheet item, but not a P&L item).
 

#2
cp_acwt  
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You go to a restaurant to have dinner. You tip the server a percentage of your bill. That transaction is between you and the server. It is not included in the gross receipts of the restaurant.

The server reports the amount received in tips to the employer. The tip amount is added to the servers regular payroll (gross pay) only to calculate Social Security, Medicare and Withholding taxes and then deducted back out (not included in the net pay of the server) the server already has the tip dollars in their possession.
 

#3
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Thanks for your reply.

I don't do this, however, as I don't use cash.

If my bill is $40, I add $8 to the bill and pay with my credit card.

So the $48 goes to the restaurant and the restaurant's merchant sends a 1099K to the restaurant to include all $48.
 

#4
Joan TB  
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...which is another reason why the Form 1099-K is nothing but a PITA!
 

#5
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My mentor says that you do not include it in gross receipts, and you do not expense it when you give it to the employee.

He says that the IRS is used to it not matching for restaurants and nail shops, etc, and they don't send letters over the small differences.

But how would the IRS computer (that sends the letters) "know"?

And is 15-20% a small difference when you gross $1,000,000?
 

#6
cp_acwt  
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I don't know how I missed the part about the tips processed through the credit card merchant. In that case, you could add tips to gross receipts, or better still, have a separate gross receipts category for credit cards. If the 1099-K total includes the charge for the meal plus tips, then report the total in the separate gross receipts category; back out the tips returned to employees under a separate sales returns and allowances category.
 

#7
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ItDepends wrote:But how would the IRS computer (that sends the letters) "know"?

And is 15-20% a small difference when you gross $1,000,000?


From experience, they don't.
I usually gross up gross receipts to the 1099K, even though it is wrong.
Easier to explain the reasoning for including it than responding to notices.
~Captcook
 


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