Washington law requires employers to pay their employees a minimum wage. However, there are certain circumstances where employees can receive customer tips. When this happens, employers need to know how to handle the payment and taxes on that money to avoid legal penalties.
Understanding a tip
A tip is a non-compulsory payment given by a customer to an employee over the agreed-upon price for goods or services. Tips can be generally categorized into two: direct and indirect. Direct tips are those that the customer gives to the employee directly when paying for services or goods. Indirect tips are those that the customer gives to the employer, who then distribute the money among employees. An example of an indirect tip would be a service charge added to a bill at a restaurant.
Taxes on tips
All tips received by an employee must be reported as income on their tax return. Employers must withhold federal income taxes, Social Security taxes and Medicare taxes from all employees’ wages, including any tips they receive. However, employers are not required to withhold state or local taxes from employees’ wages unless the employee specifically requests it.
Employees are responsible for paying any taxes owed on their tips. Employees who do not report their tips may be subject to penalties, interest and fines.
Employers must maintain records of all business transactions where tips are received. This includes the date, amount and name of the employee who received the tip. Employers must also provide their employees with a statement of their total wages and tips at least once a month.
If an employer does not pay their employees correctly, they may be subject to penalties. The Washington State Department of Labor & Industries (L&I) can assess penalties of up to $500 per violation. Additionally, the employer may be required to pay back any unpaid wages plus interest. Employees who are not paid correctly may also file a civil lawsuit against their employer.