A busy Saturday on Marietta Square can produce more tip income for a restaurant’s staff than the restaurant itself earns in profit that day. Brunch service around Glover Park, a concert crowd, a festival weekend: the money moves fast, much of it through card terminals and some of it still in cash. And every dollar of it has to end up correctly in payroll.
Tip reporting is one of the few areas where a restaurant owner carries tax responsibility for money that never belongs to the business. It has also become more confusing, because recent federal and Georgia changes created new tax breaks for workers that depend on how employers record and report tips. This guide covers the tip reporting basics every restaurant, bar and café on and around Marietta Square should have in place.
Tips are wages for payroll tax purposes
For federal payroll tax purposes, tips an employee receives are treated as wages. The mechanics work like this:
- Employees report tips to the employer. An employee who receives $20 or more in cash tips in a month while working for you, including tips paid by card, must report them to you by the 10th of the following month. Noncash tips, such as tickets or goods, are not reported to the employer but are still taxable to the employee. Many restaurants capture this through the point-of-sale system at the end of each shift rather than on paper.
- The employer withholds and pays on reported tips. Reported tips are subject to income tax withholding and to the employee’s share of Social Security and Medicare tax, and the employer owes its matching share of Social Security and Medicare tax on them as well.
- Tips flow into quarterly and annual filings. Reported tips appear on the quarterly Form 941 and on each employee’s Form W-2.
- Not enough wages to withhold from. When an employee’s regular pay is too small to cover the tax due on reported tips, the uncollected employee Social Security and Medicare tax is reported in box 12 of the W-2 rather than simply ignored.
Cash tips, card tips and tip pools
Card tips are the easy part. They pass through your processor and your point-of-sale system, so the data already exists. The work is making sure the tip totals in the POS agree with what payroll actually reports, especially when tips are paid out in cash at the end of the shift rather than through the paycheck.
Cash tips depend entirely on what employees declare. The restaurant’s job is to make declaration routine, easy and consistent, and to keep the records that show it asked.
Tip pools and tip-outs add a layer. When servers share tips with bussers, bartenders or runners, each employee generally reports the tips they receive and keep, including their share of the pool. If the restaurant collects all tips and redistributes them itself, the redistributed amounts are generally treated as wages paid by the employer. Records of who received what support either approach.
An automatic gratuity is not a tip
A mandatory service charge, such as an automatic 18% added for large parties, is generally not a tip for tax purposes, because the customer did not freely decide to pay it. When it is distributed to employees, it is treated as regular wages. That distinction has become more important under the new federal rules, so it is worth coding service charges separately in both the POS and payroll.
The 8% rule and Form 8027
Larger restaurants have an additional annual filing. A food or beverage establishment where tipping is customary and food or drinks are consumed on the premises, and that normally employed more than ten employees on a typical business day during the preceding year, generally must file Form 8027 each year, subject to certain exceptions such as fast food operations. The form reports gross receipts and tips.
If the tips reported by employees add up to less than 8% of the establishment’s gross receipts, the employer generally must allocate the difference among directly tipped employees and show the allocation on their W-2s. The IRS can approve a lower rate, but not below 2%. Allocated tips are not subject to withholding by the employer and are not reported as wages on Form 941, but they do signal to the IRS that reported tips may be low.
The FICA tip credit
Restaurants pay employer Social Security and Medicare tax on reported tips, but many can claim part of it back. The credit for employer Social Security and Medicare taxes paid on certain employee tips, under Section 45B of the Internal Revenue Code, generally covers, for food and beverage businesses, the employer’s share of those taxes on tips above the amount needed to bring an employee’s pay up to the federal minimum wage as it stood on January 1, 2007, which was $5.15 an hour. The 2025 federal tax law extended the credit to certain beauty service businesses, which use a different minimum wage measure.
The credit is claimed on the business income tax return, it is often significant for full-service restaurants, and it is frequently missed when the business return and payroll are handled by different people.
What changed for tipped workers
The 2025 federal tax law created a new deduction for qualified tips, available for tax years 2025 through 2028. Eligible workers can deduct up to $25,000 of qualified tips on their individual returns, with the deduction phasing down at higher incomes. Two details matter to employers:
- It is a deduction, not an exclusion. Tips remain wages for payroll tax purposes. Social Security and Medicare tax still apply, and the employer’s withholding and reporting obligations do not go away.
- Employers report qualified tips separately. To support the deduction, beginning with 2026 Forms W-2 employers report qualified tips in box 12 with code TP and the employee’s tipped occupation code in box 14b. Qualified tips must be voluntary, not negotiated and determined by the customer, which means mandatory service charges generally do not count. If your payroll system mixes the two, your employees’ deductions are at risk.
Georgia’s separate tip exclusion
Georgia added its own benefit, and it works differently from the federal one. For tax years 2026 through 2028, Georgia excludes up to $1,750 of cash tips per taxpayer from Georgia taxable income. For this purpose, cash tips include tips paid by card and amounts received through tip sharing. The tips must be paid voluntarily, the amount must be determined by the customer rather than negotiated, and the worker must be in an occupation that customarily receives tips, tied to the federal tipped occupation codes. It is an exclusion on the Georgia return, not a deduction, and its cap and requirements are separate from the federal rules.
For employers, the practical point is the same as on the federal side: clean, separate records of voluntary tips versus service charges are what allow employees to claim what they are entitled to.
A monthly tip reporting routine
- Reconcile POS tip reports to payroll for every pay period, including tips paid out in cash at shift end.
- Collect cash tip declarations every shift and keep the records.
- Keep tip pool and tip-out records showing who received what.
- Code automatic gratuities and service charges separately from tips in both the POS and payroll.
- Track reported tips against gross receipts if Form 8027 applies.
- Confirm that your payroll provider is set up to report qualified tips and occupations on W-2s before year-end, not in January.
Payroll and tip reporting support from our Marietta office
Manay CPA’s Marietta office works with restaurants, bars and hospitality businesses across Marietta and East Cobb. We run payroll and payroll tax filings, reconcile tip data to the books as part of our accounting services, and make sure credits like the FICA tip credit reach the business return. For more on the income tax side, see our guide to tax write-offs for restaurant owners, or learn more about our work in hospitality.
Frequently asked questions
Are tips subject to payroll taxes?
Yes. Tips employees report to their employer are subject to income tax withholding and to Social Security and Medicare tax, and the employer pays its matching share of Social Security and Medicare tax on them. The new federal tips deduction does not change this.
Who has to file Form 8027?
Generally, food or beverage establishments where tipping is customary, where food or beverages are consumed on the premises, and that normally employed more than ten employees on a typical business day in the preceding year, with some exceptions. The form reports gross receipts and tips, and may require tips to be allocated if reported tips fall below 8% of gross receipts.
Is an automatic gratuity for a large party a tip?
Generally no. A mandatory service charge is not a tip because the customer did not freely choose to pay it. Amounts distributed to employees from service charges are treated as regular wages and do not count as qualified tips for the federal tips deduction.
Is Georgia’s tip exclusion the same as the federal tips deduction?
No. The federal rule is a deduction of up to $25,000 for tax years 2025 through 2028. Georgia’s rule is an exclusion of certain cash tips from Georgia taxable income, capped at $1,750, for tax years 2026 through 2028, with its own eligibility requirements.
Talk to us
If you run a restaurant on or near Marietta Square and are not sure your payroll is capturing tips the way the new rules require, we can review your setup before year-end. Book a consultation with our Marietta team.
