I have wage staff that runs our reception and allow them to earn tips. We find their level of service increases if they can potentially earn a tip. In no way are we reducing base wages and off-setting with tips, but rather use tipping as a increased customer service mechanism.
We then submit those "extra earnings" to the gov and get taxed on them as payroll tax, but they aren't. I fully understand the government's desire to tax the income, but tips aren't wages so why does the business have to pay payroll taxes on them? It seems an over-reach by the gov and I'm curious to know what legal grounds they have to do this.
You have to pay because it is a Federal Law and, more than likely, a State law as well. Any you confuse wages with income. Tips are income and, as such, are taxable as any other income.
Don't misunderstand my personal view with the legal obligation which you have.
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