Report employee tip taxes that payroll could not collect

An employee can report taxable tips while having too little cash in the employer's hands to fund all required withholding. Preserve the employee's tip report, report date, regular wages and other funds available for collection. Tips already retained by the employee are not automatically cash available in the payroll funding account.

IRS Publication 15 treats tips as paid when the employee reports them to the employer and describes the associated withholding and deposit rules. Keep the reported tip amount in the wage record even if employee tax cannot be collected. A negative net-pay result should not be solved by deleting accurately reported tips.

Publication 15 specifies an order when funds are insufficient: withholding on regular wages and other compensation, then Social Security and Medicare taxes on tips, then income tax on tips. Have payroll show how available funds were applied. A proportional reduction across all taxes may not follow the required sequence.

Maintain employee-level amounts for calculated tax, tax actually collected and the remaining shortfall. For a hypothetical reviewed employee-tax amount of $180 with $120 collected, the unresolved difference is $60. That arithmetic does not allocate the shortfall between tax types; the prescribed order and employee's actual tax calculation determine that split.

Keep employer taxes outside the employee collection shortfall. The publication states that the employer remains responsible for its applicable Social Security and Medicare taxes on reported tips. Insufficient employee funds do not establish an equivalent reduction in the employer's own liability.

Record the month in which the employee's tip report was received and the collection deadline under Publication 15. Its ordering rule explains when the employer no longer has to collect employee tax if funds remain unavailable. Have the provider apply that timing instead of carrying an unexplained negative paycheck indefinitely.

Preserve additional employee funds supplied during the applicable period and the taxes they satisfy. Explain the amounts to the employee using the payroll record. Any later payroll deduction or repayment arrangement must follow the applicable authorization and wage rules; an accounting receivable does not by itself authorize collection from future pay.

Publication 15 and the Form 941 instructions describe the adjustment for uncollected employee Social Security and Medicare taxes on tips. Ask the preparer to reconcile that adjustment to the employee-level shortfall schedule. Reported tips, collected withholding and employer taxes remain distinct amounts in the reconciliation.

The W-2 instructions use code A for uncollected employee Social Security tax on tips and code B for uncollected regular Medicare tax on tips. These amounts are not reported as taxes actually withheld in the corresponding withholding boxes. Code B does not include uncollected Additional Medicare Tax, which requires its own reviewed treatment.

Before issuing the W-2, compare reported tips, wage boxes, actual withholding and the uncollected-tax codes with the final payroll schedule. Identify any correction received after the original tip report. Keep the original report and revised evidence so a later adjustment can be traced to the employee and reporting period.

Explain that the W-2 distinguishes tax collected by payroll from tax that remains uncollected. Direct personal return questions to the employee's tax adviser. Close the employer's file with the tip reports, available-funds calculation, collection history and filed reporting, so an employee's cash shortfall does not become an inaccurate wage or tax statement.