Where do I report tips paid out on my form 1120s? Is it totaled with payroll or a seperate line iteem

[IRonMaN · Accepted solution]

Tips should have been included with employee wages on their W-2s.

[cas8161]

They were but my wages on w-3 does not total what would be on return.

[IRonMaN]

Why not?  

[qbteachmt]

W3 and W2 should match. What does not necessarily match is Wage Expense in the P&L, because tips collected from Customers are your liability, and paying out tips in payroll or simply using it in payroll to compute taxes, means it still isn't the employer's expense and isn't employer Wage expense, even though it is Taxable compensation to the employee. The Employer didn't provide the funding, in other words.

[Ron253]

Seems I may have a different question than the OP even though the words are the same...

The IRS did a 1099 reconcile and "found" credit card "revenue" that was tip pass-through dollars to employees and reported on W2/W3s by ADP, payroll taxes were paid, etc.

The CPAs for prior years all just historically ignored tips on the 1120 since it's not actual revenue; Is this a Line 10/26 thing that wasn't done in error for multiple years or is this an IRS reconciliation anomaly because of an unusual legit Line 10 entry for the year in question?

[qbteachmt]

"The IRS did a 1099 reconcile and "found" credit card "revenue" that was tip pass-through dollars to employees and reported on W2/W3s by ADP, payroll taxes were paid, etc."

I think you are referring to a 1099-K?

"The CPAs for prior years all just historically ignored tips on the 1120 since it's not actual revenue; Is this a Line 10/26 thing that wasn't done in error for multiple years or is this an IRS reconciliation anomaly because of an unusual legit Line 10 entry for the year in question?"

The point is: either you treat Tips inflow as Income and the payment is part of Expense. Or, it is not Income but Liability, and paying it out clears the employer liability, the same as Cash/Check Tips would be handled. Or, you allow the employees to report Tips to the employer and the IRS accepts the formula in use.

You would not ignore them. There are provisions for cash flow on the Balance Sheet. Tips In = Liability. When the employee takes it as Cash, that's really an Employee Loan as Cash Advance, against the settlement of tips through payroll. I would examine how tip flows are being processed for this entity.

Which isn't the same as this topic at all.