WAGES and 401(k) Withholding

[Guest HFOSTER]

My question is on TIPS. Tips are included as gross compensation in my definition of compensation. For this employer, tips are paid out in cash at the end of each day. Many employees earn 80% or 90% of their pay in tips. With FICA, medical, etc, being withheld on the remaining 10-20% there is often a zero net paycheck. Many of these employees want to participate in the 401(k) plan, especially since there is a generous match. Is there any way to do this 401(k) withholding on the tip income since there is not enough of cash running through payroll to withhold on?

[Blinky the 3-eyed Fish]

Give some of the cash back? Seriously, there has to be a logistical way. Have you tried talking to your employer?

[MWeddell]

I'm running into the same situation as HFOSTER described for one of my clients in the restaurant industry. Does anyone else have suggestions?

[alanm]

The IRS requires the employer report at least 8% of ticket sales as tips on the servers W2. Usually half of the food checks are paid by credit card and the employer gives the tips on the card receipts to the server either daily or weekly. The employer must withold enough of that tip income and run it through payroll in order to get the deferral amount. Otherwise, there is no other way to accomplish this.

[GBurns]

Since the total amount is reported on the W2 and should equate with 8% of gross sales, it seems that in the scenario posted by HFOSTER there is an underreporting and under withholding issue.

If the Total weekly earnings (Tips+) = $700 FICA etc should be withheld on that $700 but as described by HFOSTER only (10-20%) $70 - $140 is used for withholding and deduction purposes. Isn't this misreporting and under withholding?

[alanm]

You can refer to IRS publication 531 for the long answer; but, the employer is required to withhold on all tips reported to him by the employee. The employee can also file a form 4070 with the employer and the employer files an information form 8027 at the end of the year. There usually is under reporting; however, the employee can ask the employer to keep the charge slip tips and do proper withholding and make a 401k deferral; however, retaurants are never easy. The average waiter reports the required 8% and does not report the extra 7% that equals the usual 15% tip. It is an industry-wide problem.

[Guest TAG]

Are you serious? Why would you want to defer income on money you are evading taxes on? GBurns is dead on. Pigs get fat, Hogs get slaughtered.

TAG

[alanm]

The 8% tips and the wages are reported and are fair game for a 401k deferral. What is not usually reported is the excess tips over 8%. Reality is: the average waiter makes 24k a year and reports 16k. The standard deduction is $5500 and the personal exemption is $3300 yielding taxable income of 7k and a tax owed of $800, and with the earned income credit they may not even pay that. So how much under withholding can occur? Trying to get a waiter to report all of their tip income is like trying to teach a pig to sing: Its a waste of your time and it annoys the pig. So stay cool; I have a lot of 401k plans in restaurant and they work to an extent, but it ain't perfect.

[K2retire]

Related question: when the amount of cash that the employer has on hand is not sufficient to cover both the tax and deferral withholdings on the reported income, may the employee give back some of the cash tips to cover the deferral amount? To further complicate matters, what do you do if the employee fails to turn in the cash to cover the deferrals that the employer deposited on their behalf?

[cheersmate]

Related question: when the amount of cash that the employer has on hand is not sufficient to cover both the tax and deferral withholdings on the reported income, may the employee give back some of the cash tips to cover the deferral amount? To further complicate matters, what do you do if the employee fails to turn in the cash to cover the deferrals that the employer deposited on their behalf?

Has this been addressed?

If the employee fails to give sufficient amount of cash tips to the employer to cover the deferrals, what options does the employer have to (1) collect it from the employee? (2) to satisfy the deposit of deferrals? (3) to determine the correct match - does the employer match what was actually withheld from payroll (could be zero bc zero remaining after mandatory payroll tax withholding)?

Thank you.