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Taxes on Tipped Employees

Hello, I'm looking for some direction on calculating checks that involve tips that are not paid on the check. The IRS says this in tax topic 761 regarding the order to do the calculation:
1.Social security and Medicare taxes on the employee's wages,
2.Federal income taxes on the employee's wages,
3.State and local taxes imposed on the employee's wages,
4.Social security and Medicare taxes on the employee's reported tips, and
5.Federal income taxes on the employee's reported tips
https://www.irs.gov/taxtopics/tc761.html

My question is, where do you calculate the state and local taxes on the EE's reported tips? Should it be done in step 3? Or is the IRS missing step 6?

Comments

  • I am not entirely sure I understand the sort of answer you are looking for. Almost everyone uses some sort of payroll system. Some have features which handle tips. With older systems you enter offsetting earnings/deductions. This will cause the taxes to calculate correctly.

  • Hi David, I'm looking for how one would do the calculation manually. Basically, I want to know at what point should you calculate the state and local taxes on the tips when there won't be enough earnings to cover all the taxes that should be deducted, and in what order those taxes should be reduced.

  • No one-size-fits-all answer. You sot of need to check the rules for each state. Generally speaking FIT/SIT comes last, FICA comes first, and other state/local taxes come somewhere in the middle.

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