As a restaurant employer, are employee cash tips (included as wages on 941's & W-2's) deductible as wages on my business tax return?

[Carl]

No, unless you claim their tips as taxable business income first. You can only deduct from your taxable income, that which can be taxed. So if you don't claim their tips as taxable business income, you can not deduct those tips from your taxable business income.

[Opus 17 · Accepted solution]

You can deduct the employment taxes that you pay on the Tips, but you can't deduct the Tips yourself because you didn't pay them.

[Carl]

That makes sense. I was reading through that stuff in the IRS W-2 general instructions and when the SE tax part came up for the 940, I was getting ready to post here again. But I see you covered it, and also clarified it for me. Thanks.

[DanG91]

@Opus 17Do you just simply report the wages paid out, leaving off the tips? The instructions say to make the wage expense match line 1 on the W-3 form, and line 1 of the W-3 includes tip income.

[Opus 17]

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@DanG91 wrote:

@Opus 17Do you just simply report the wages paid out, leaving off the tips? The instructions say to make the wage expense match line 1 on the W-3 form, and line 1 of the W-3 includes tip income.

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I think someone else is going to have to help you with that, it sounds like you need help with Quickbooks rather than Turbotax, to get the tips to show up as W-2 box 1 wages without being a deductible business expense.  

[Carl]

it sounds like you need help with Quickbooks rather than Turbotax

I haven't taken the time to look at the details. But in the desktop version of QB2018 and newer, you have your payroll liabilities assigned to a specific tax line. You need to create a sub-account under your payroll liabilities and leave the tax line assignment as "unassigned".

Then when employees report their tips to you at the end of each shift, you enter the amount in the sub-category of where you record what you pay your employees each pay period.

What you pay your employees is reported in the category with the tax line assignment.

What your employees receive as tips, gets assigned to the sub-category under that, which has no tax line assignment.

Then when you generate pay stubs, make sure you set it up to include the payroll category and exclude the sub-category under it. Otherwise, if the paystubs include the tips, then so will the paycheck you issue them.

[DanG91]

@Opus 17Thank you. I believe the tips are showing up in line 1, but the turbotax question asked for wage expenses and suggested that they be the same as line 1. which is why i had the question.  i believe this poster is having the same question that I do. https://ttlc.intuit.com/community/tax-credits-deductions/discussion/re-how-do-i-report-payroll-expen...