Tips and Wage Expense on Schedule C

[DanG91]

Wage expense states that it should be equal to Box 1 of the W3 form.  HOwever Box1 includes reported tips.  Reported tips should not be an expense should they? As the business owner, i did not pay that to the employee, the customers did.  I did pay FUTA and social Security, medicare, etc on the tip amount.  But, i dont get to claim all reported tips as an expense do I?

Am i missing something here?  Do i need to have the reported tips offset, perhaps by showing the reported tips as income as well?

[LudwigVan_fan]

Hi:

No, wage expense for line 26 should be the gross wage paid to the employee.  If the employee reports tips to you for purposes of FICA taxes, that is different than the wage you actually paid the employee.

See instructions for Line 26; salaries and wages

https://www.irs.gov/pub/irs-pdf/i1040sc.pdf

Wage expense equal to Box 1 of the W-3 would not be accurate for tips reported but not controlled by the employer.

[DanG91]

@LudwigVan_fan  so perhaps the software is saying it needs to be equal to box1, but not meaning in the instance if you have employees who receive tips?  This will not be a "red flag", having the two amounts not be equal?

[LudwigVan_fan · Accepted solution]

It shouldn't be.  Wages paid by you do not include tips received by the employee.  They report them to you so that FICA can be withheld from other wages on those tips.

Just keep good records.

[DanG91]

Thank you @LudwigVan_fan  .  I am fairly confident that even in an audit, this can be discussed and explained quite easily.  I'm not trying to get away with anything here...  

[LudwigVan_fan · Accepted solution]

You are correct, even if you are audited, it should be easily explained.  The auditor really shouldn't even bring it up.

I audited a number of restaurants during my career.  Several audits focused on tips and tip reporting.  It was never a problem to reconcile W-3 gross wages to wages deducted on the tax return.  The difference should be the reported tips.  If that doesn't reconcile, then there may be other problems.

The biggest problem was unreported tips.  There were a few instances when charged tips were greater than reported tips.....how does that work?