Feb. 27, 2003
The Internal Revenue Service wants to extend a helping hand to restaurant operators this tax season.
Sort of sounds like a burglar offering to help count your cash drawer, right?
Not so, according to Rebecca Johnson. The Cincinnati-based IRS Business Unit representative said the offer of assistance is both genuine and beneficial to both the government and operators.
Johnson, who spoke at the Mid-America Restaurant, Soft-Serve & Pizza Show on Feb. 23, said operator wariness of Uncle Sam's tax collection arm is understandable. But she insists the IRS is taking steps to ease the burden of business and employee income reporting.
"We're trying to be more proactive and work in partnership with you so don't run into any problems," said Johnson, speaking during the two-day event in Columbus, Ohio. "When we can help make you aware of what you have to pay and what you can deduct -- ahead of time -- we both win."
Johnson covered several issues of particular importance to restaurant operators, namely accurate reporting of tipped employees' income. For too long, she said, operators have underreported employee tips, sometimes mistakenly and other times deliberately. Those deliberately trying to skirt the law, she said, likely don't want to pay the higher Medicare and social security taxes that come with more thorough reporting.
But operators looking to save some money on business taxes, she said, are better off following the law and taking advantage of the Internal Revenue Code (IRC) 45b tax credit. The rule provides a tax credit equal to the social security and Medicare taxes operators paid on employees' tips over and above the amount paid to meet the federal minimum wage standard.
"This is a real benefit that you should take advantage of if it applies to your business," she said.
'I can't be a tip police'
Many operators who've been audited and penalized for poor tip income reporting, said Johnson, complain they can't force tipped employees to be truthful about their earnings. What she said owners can do is be diligent in educating tipped employees of their obligations.
That effort is made simple with IRS training and tip tracking materials such as the daily tip recording book (Publication 1244), its "Tips on Tips" guide (Publication 1872), and the videotape "Tips on Tips" (Publication 3374).
"These are great resources you can train your employees with," Johnson said. "All of these guides are free, and a lot of this same information can be found on the IRS Web site."
Johnson recommended that operators who train their staffs to report tips accurately should consider signing one of three voluntary compliance agreements. The agreements would, in essence, reduce the chance of an IRS audit should problems arise. They are:
* Tip Reporting Alternative Commitment (TRAC). This requires the IRS to work with a business owner to establish an average rate for its tipped employees.
* Tip Rate Determination Agreement (TRDA). This does not establish a tip rate, but it requires employers to establish regular and accurate reporting procedures for tipped employees.
* Employer Tip Rate Determination Agreement (EmTrac). This allows employers to establish their own TRAC and tipped employee reporting procedures.
For more detailed information on these agreements, visit the Web page "Voluntary Compliance Agreements -- Restaurant Tax Tips."
For operators who aren't willing to train their employees to report properly, Johnson pointed to a 2002 U.S. Supreme Court decision as an incentive. The justices' ruling gave the IRS the authority to make tip estimates (largely from credit card receipts) to figure whether an operator is in compliance with the law. Operators whose numbers don't align with the government's, Johnson said, will be fined and assessed the tax outstanding.
Get it right the first time
Johnson said that a large percentage of restaurant operator tax problems boil down to making simple mistakes on employees' W-2s, such as entering an incorrect social security number.
IRS Tax Helps
All of the following are available free of charge through your local IRS office.
Publication 4069 (7-2002)
* Electronic Federal Tax Payment System (EFTPS)
* Employee's Daily Record of Tips and Report to Employer
* Tips On Tips
* Tips On Tips video
Publication 3374 (4-1999)
"Asking for an employee's social security card is the easiest thing, and you need to do it when you hire them," she said. Mistakes such as this, she warned, will result in a fine if made. "If you submit incorrect information, you could be assessed a penalty of $50 for each incomplete or incorrect W-2, with a maximum penalty of $100,000."
Perhaps worse than the fine, she said, is the time and effort spent changing incorrect information. "You don't want to have to do that. Trust me."
A Web-savvy restaurant operator, she continued, can help his cause by verifying and updating all his business-related social security witholding information at another IRS Web site, www.ssa.gov. The site provides detailed instructions on scheduling of payments and tax witholding.
Johnson also encouraged operators to go a step further by using the Web to make payroll tax deposits (941 form) and 1040 estimates to the Treasury Department via the Electronic Federal Tax Payment System (EFTPS).
"I truly believe you're going to find this helpful to your business," Johnson said. "This will virtually eliminate misapplied deposits. If you've ever tried to correct a misapplied deposit, you know what a pain in the neck that is. This allows you to see online if you've made your deposit accurately."
Johnson said once an operator enrolls at the Web site, a personal identification number (PIN) is sent in the mail, which allows him to begin using the site's features.
One 'small' bonus for 2002
Restaurant operators get a present from the IRS this year in the form of a smallwares deduction.
The cost of replacing items such as pots and pans, glassware, bar tools -- even small appliances costing less than $500 -- can be deducted. In the past, those items had to be depreciated.
"Now you can deduct the cost of replacement smallwares in the year they were purchased," said Johnson, adding that this does not include smallwares purchased to open a restaurant. "This is a huge benefit for restaurateurs."
For more information, see Publication 4069 (7-2002).
Johnson strongly encouraged operators to use the IRS Web site to learn more about running their businesses according to the law. She said the site provides easy access to important information gathered much slower by phone calls.
"Business owners can access that information at any time of the day, which is very convenient considering most of you work nearly all day," she said. "One study I've seen said most business owners don't have the chance to get on their computers until 11 o'clock at night. Try getting a tax question answered at that time of the day. That's what our Web site is for, so you can just log on and have a vast amount of information at your fingertips when you have the time."