How to distribute and claim tip tax exemption?
We own a mom & pop business, an LLC, IRS treats as a partnership of my wife and me, no paid employees. Our income is as owners draw as needed from net profits. My question is about reporting of $15,000 tip income, which is not distributed to us, just left in income. If we pay the tips to us and report as income, which is now exempt up to $25k, do we need to issue 1099s to each partner? Or can we just transfer the tip income into owner's equity. If so, how can we claim the tip tax deduction?
Quick Answer:
Based on current tax law, there is **no federal tax exemption** for tips up to $25,000. While this has been a topic of political discussion, it is not currently law.
In a partnership (LLC), "Owner’s Draws" are not deductible expenses for the business; they are distributions of equity. You do not issue 1099s to yourselves. Instead, all net profit—including the $15,000 in tips—flows through to your personal returns via **Schedule K-1**.
Regarding your questions:
1. **Reporting:** The $15,000 in tips is simply part of your gross receipts. Whether you leave the cash in the business bank account or move it to "Owner's Equity," it is taxable income to you in the year it was earned.
2. **The "Tip Tax Deduction":** There is no general "deduction" for receiving tips. There is a **Section 45B Credit**, but it only applies to employers who paid FICA taxes on employee tips. Since you have no employees and do not pay yourselves W-2 wages, you do not qualify for this credit.
All business net income is subject to ordinary income tax and self-employment tax. If you are unsure about state-specific exemptions, consult a local professional.
Note: This answer is provided for convenience only. It is important that you speak to a CPA about your individual tax situation.
