Tips can make up a large part of what restaurant employees earn, and they create extra tax responsibilities for employers.

For employees

Tips are generally taxable income, whether they are paid in cash or by card. Employees who receive $20 or more in tips in a month generally must report them to their employer. A daily log can help you keep accurate records.

The deduction for qualified tips

For 2025 through 2028, eligible workers may be able to deduct qualified tips, up to $25,000 per year. The deduction phases out at higher incomes, and it applies to federal income tax, not Social Security and Medicare taxes. Ask a tax professional whether you qualify.

For employers

• Withhold and pay payroll taxes on reported tips
• Keep accurate records of tips reported by employees
• File the required forms, including Form 8027 if you qualify as a large food or beverage establishment
• Make sure that card tips are recorded properly in your payroll system

A possible credit

Many food and beverage employers may qualify for a federal credit for part of the employer Social Security and Medicare taxes paid on tips. Ask your CPA whether it applies to you.

Good systems help

Your point-of-sale, payroll and accounting systems should work together, so tips are reported correctly and reports are easy to reconcile.

Have questions about your situation? Tax rules change and every situation is different, so please talk with a professional before acting on general information. Call Fajardo & Associates at 407-720-7220 to make an appointment.