How Taxes Differ for Restaurant Employees

Individuals who work in New Jersey and New York have to pay state income taxes along with their federal income taxes. For restaurant employees and others in tipped positions, how to pay these taxes is not always obvious. It can be easy for a tipped employee to under-report his or her earnings to pay less in taxes or an employer to avoid paying payroll taxes by hiring employees to work “off the books” or hiring them as independent contractors. These unethical and illegal practices can put employers and employees in positions where they suddenly owe large amounts of money to the Internal Revenue Service (IRS) or potentially face wage and hour law violations.

Reporting Tips as Taxable Income

Tipped employees are required to report the tips they earn with Form 4070, Employee’s Report of Tips to Employer on the 10th day of the month following the month during which the employee earned the tips. This document must include the following:

  • The employee’s name, Social Security number, and address;
  • The employer’s name and address;
  • The period of time over which the tips were earned; and
  • The total amount of tips earned.

The only exception to this requirement is when an employee earns less than $20 in tips in a month’s time.

Employer Requirements

Although the federal minimum wage for tipped employees is $2.13 per hour, employees who do not make at least the New Jersey minimum wage of $8.25 per hour or the New York minimum wage that applies to their location must be compensated the difference between their actual earnings and the applicable minimum wage. Because a server’s primary income is through tips, rather than his or her hourly pay, being undertipped or under-reporting tips can mean the employer has to pay the employee extra hourly compensation.

Employers must report that the tips their workers report are at least 8 percent of the restaurant’s total gross receipts for the month. This does not include non-allocable receipts, which are receipts with service charges of 10 percent or more and receipts for takeout sales. If employees report tip levels of less than 8 percent of the restaurant’s gross receipts, the employer must make up the difference. When employers pay payroll taxes for tipped employees, these taxes come out of the employees’ paychecks, rather than their tips. Because of this, it is not uncommon for tipped restaurant workers to receive paychecks for only a few dollars or even paychecks for $0. Although the money comes from the employees’ checks, it is paid based on the total income they report.

Work with an Experienced New Jersey Employment Lawyer

If you faced any type of dispute with your employer regarding paying your taxes, speak with an experienced New Jersey wage dispute lawyer about the situation to determine the right course of action for ensuring that you are compliant with the law. Contact our team at Sattiraju & Tharney, LLP today to set up your initial consultation with one of New York and New Jersey’s premier employment law firms.