I’m getting a lot of questions on this one from clients and figured it would be good info for many out there.
If you own a small business and have had to lay off or furlough staff during this difficult time, you may wish to offer those who would like to assist an opportunity to contribute to a so-called “virtual tip jar”.
The issue is that tips are taxable income that should be run through payroll… whereas most of what we’re talking about right now are rightly termed as “gifts” — which are non-taxable to the recipient. Only if the gift exceeds $15k to any one recipient does the gifter (not recipient) have to file a gift tax return. The IRS requires that to qualify as a gift, the property (usually cash in this case) must be given without expecting to receive something of at least equal value in return.
It is reasonable to argue that these gifts are not lost wages or wage replacement — nor are they income to the company and then payroll to the staff. These are people who have simply lost their jobs through no fault of their own or the business owner’s, and we’ve become friends with these folks through the years and want to help. These are the people who’ve poured us that soothing cup of herbal tea during rough times, or a shot of tequila during rougher ones. They’ve taught us to mold clay, or taught our children music. We’ve gotten to know and love them and we want to help. That’s a gift. So here are a few “tips” for making sure your tips don’t inadvertently become taxable income to your business or your staff.
1) Make sure these are in fact gifts. No fair disguising actual sales of product or services, or trades. Don’t mess this up for everyone else.
2) Use GoFundMe, rather than an existing business method of collecting payments — not Paypal, Square, Stripe or anything else. The reason is that these businesses are required by law to send a 1099-K to you and the IRS, because the government is correct to assume that in general, those funds should be considered income. Whereas, the money in this case isn’t “income” to the business, so we need to make that clear by using GoFundMe, which is set up for arms-length gifting.
3) Secondly, use your personal name and your personal bank account for this — do not run it through the business and do not use the business EIN/ Tax ID. Again, we’re trying to make it clear that this money is just a gift to the employees out of the goodness of everyone’s heart, and not a replacement of wages that would be taxable via payroll.
4) Which brings me to another important point: do not run this through payroll. Think about it: all that is happening is that a disinterested but kind third party (a plain old nice human such as myself) decides to gift money to your staff because I feel bad that they are out of work. So I give you some money, since you’re a trustworthy person who has everyone’s contact info and can fairly distribute it. And you, personally, then take the funds and hand them out. No business account, no payroll, just an altruistic gift that you are passing along as the middle man.
There are certainly situations out there and arguments to be made that in some circumstances, these funds would qualify as income to the business, and then the payments would need to be made to employees via payroll. This is not a comprehensive post designed to address all of those alternative contexts — and should not be relied on as tax advice. Please consult with your CPA or attorney for specific questions about your own business.
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. This allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.