The first point to get out of the way is that chips are casino tips. It doesn’t matter they aren’t legal tender, they do have monetary value in the world of the casino.>
Chips are tips. Tips must be reported, ergo tips received as chips must be reported.
With that clear, we can move on to the minutiae of managing, reporting, and paying taxes on tip income.
Who has to report casino tips? Who do they have to report them to?
Any employee who receives at least $20 in tips during a calendar month has to report it to their employee by the tenth of the following month. Employees are also expected to keep a daily record of their tips. They can do this using an official IRS form or in any notebook, as long as they include the required information on a daily basis.
The purpose of the daily record is to ensure a level of accuracy in the reporting. When a casino dealer keeps a log of daily casino tips, she can’t go back to alter amounts received. It’s not a perfect record, but it’s helpful. More importantly, if the IRS has any questions about tips amount claimed, they’ll expect to be able to review this daily tip documentation.
Employees also have to include their tip income as a line item on their annual income tax form.
The penalties on employees for not reporting or underreporting tips can add up.
Employers have employee tip obligations too
While employees include tip income on their annual income tax filing, there’s a reason they have to make a monthly report of tip income to their employers. Tip income must be included in your payroll calculations. All the usual payroll taxes and deductions apply to tip income, certainly on the federal level. This includes employee and employer shares of FICA, Medicare, Social Security, and perhaps even federal unemployment tax.
Consult with your tax attorney about what taxes the casino needs to pay on tip income imposed by other applicable taxing authorities. In any case, you can’t pay any of those taxes or make those proper deductions on monthly payrolls if you don’t have a record of the tips earned.
Officially, employers aren’t liable for taxes and deductions on tips not declared by employees. Unofficially, employers know which employees earn tips and what typical tip income looks like. If you have employees who aren’t reporting tips at all or seem to be underreporting tips, don’t expect to slide.
Employees do need to sign their monthly tip report to you. The IRS also holds the employer responsible for maintaining required records and reporting regarding employee tip income.
Help the employee – help your casino
You can leave it to your employees to be diligent about tracking daily casino tips and submitting their monthly reports to payroll on time. Or… you can help them with their tip tracking, which helps you stay compliant.
The federal government has three programs designed to help employers with employee tip reporting and payments: Tip Rate Determination Agreement (TRDA), Tip Reporting/Alternative Commitment (TRAC), and Employee-designed Tip Reporting Alternative Commitment (EMTRAC). You can read an overview of the differences among them here.
The basic bargain in all these programs is a good one. The employer complies with their requirements, including implementing a tip reporting procedure, and stays timely on its federal tip reporting obligations and payments. In return, the federal government won’t go with its usual “employer first” and “employer only” audit approach. You may still get audited, but so will the employee records.>
The easiest, most reliable way to track employee tips on a daily basis is to require employees enter the amount earned in tips when they log out at the end of each shift. The latest version of ATS’s middleware enables employers to do just that.
Automating the daily collection of tip information makes life easier for everyone. Employees still need to keep their own daily record, as they have to document more information about their daily tips than just the amount. The tip information employees need to provide their employer is cash tips received, credit and debit tips received, and amount of tips paid out to other employees (in case of tip sharing). However, knowing they’ll have to enter a tip total into your payroll system each day, one that will be reconciled at a later date, will help keep them current on their documentation.
Casino tips may be a customer service tool, but they’re still income
By definition, the employer isn’t and can’t set the terms and amount of a tip. The tip transaction is entirely voluntary between the customer and employee. Even so, you can’t just think of them as an employee motivator. Casino tips are income. Your payroll and compliance processes need to account for them. Your goal is to automate and streamline their place in these processes, so you can reap the accuracy and cost-effective benefits automation provides.>