Tips Received and Distributed to Partners in LLC

[4898225]

In an LLC Partnership, gratuities or tips are received.  They are distributed to partners separate from their owner draws.  Are the tips that are received by partners reported on the 1065 as "other income" and the 1040 with Schedule C?  Or, only on the 1040 with Schedule C?  Thank you! 

[PatriciaV]

Please clarify how this income is recorded on the partnership books. Are they included in business income? Or are they recorded in some other fashion?

[Rick19744]

You should also explain what trade or business this partnership conducts; how many partners, involvement of partners, etc.

[4898225]

Thanks for responding.  The gratuity income is reported on the P&L as income, separate from sales income, but still part of business income.  Distributions go into their respective equity accounts on the Balance Sheet.  

[4898225]

Thanks for responding.  [Edited] It's a small to go restaurant.  Three partners.  First two are managing members who take gratuities and owner draws.  Third owner is not a managing member and takes very little owner distributions and does not take any gratuities.  Third owner makes many contributions / investments to the business.  

[SweetieJean]

But what are the tips paid for?  Is this a restaurant business? Are the first two owners employees of the business as well?

[4898225]

Yes, it is a restaurant. Tips are offered and paid by customers as a gratuity. The partners are not W2 employees or contractors. The first two partners take owner draws and a portion of the tips.  Paid separately by business checks.  

A portion of the tips are also shared with W2 employees.  The tips are paid to employees separately by business check and reported on their pay stub as "cash tips."  Hope this makes sense. 

[SweetieJean]

I will let someone else address the income tax aspects of this.  Although we cannot give legal advice here, it my understanding that managers and owners have no right to tips under most states' Department of Labor rules, so please consult a local attorney.  

[4898225]

Thank you for the consideration and information, SweetieJean.

The tips were given to owners (managing members) while working (labor, cooking, staff, etc.) in the restaurant.  

In 2021, there wasn't anyone else to distribute tips to other than the owners doing the work.  They were the only one's - i.e. there weren't any employees or contractors.  

That requirement that you mentioned doesn't seem right because it is income, however not income from sales.  It has to be reported somewhere.... just trying to find out if it should go directly to the schedule C or if it needs to pass through the business on the 1065 as well.  

[AliciaP1 · Accepted solution]

The tip income should be reported as income to the partnership.  The amounts the partners withdraw should be reported as distributions even if the amount taken is only tip money.  The income will then flow through to the partners on their respective K-1sand be entered into their personal tax returns via their Schedule E.  Partners do not report partnership income on a Schedule C.

@4898225

[4898225]

AliciaP1

Thank you so much!