PhorestTips: US Tax Guide for Business Owners and Staff

PhorestTips is an in-house tipping feature that allows customers to tip staff directly, bypassing the business’s financial flow. Below is a full guide to ensure you are handling tips correctly for payroll and tax purposes.

For Owners & Management

Transaction Flow

• PhorestTips allows tips to go directly from the customer to the staff member — this is done automatically without the need for the business to handle or distribute the tips.
• No processing fees are charged to the business for tips made through PhorestTips — it is completely free of charge to the business!
• If your previous tipping solution involved customers tipping via the card terminal and the tips being distributed by the business, switching to PhorestTips could save you thousands (or even tens of thousands) of dollars.

Payroll Responsibilities

A report titled Staff Tips is available within Phorest under Manager > Reports > Insights > Staff Reports.

This report provides a gross overview of all tips processed via PhorestTips and a detailed transaction breakdown per staff member.

Payroll teams can use the Staff Tips report to:

• View the gross tips collected.
• Calculate and deduct the appropriate taxes (for both the employer and employee) during each payroll cycle.

Even though the business does not pay out the tip funds (the tips are deposited directly to staff), the business is still responsible for understanding and complying with federal and state regulations, including reporting tip income and withholding applicable taxes through payroll.

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For Staff Members

1099-K Forms

Each staff member will receive, at the start of the next financial year, a 1099-K from Phorest via Stripe (Phorest's payment processor), detailing the gross volume of tip revenue earned for the previous year.

This form shows the gross volume of tips received through PhorestTips.

Important to note:

• The 1099-K should be viewed as a summary only, as the business should have paid your taxes each payroll cycle
• If your employer correctly processed your tip income through payroll (and withheld taxes), you should not owe any additional taxes on the 1099-K amounts.

W-2 Forms and Form 1040 Schedule 1

Each year, your employer will issue a W-2 that includes:

• Your salary
• Commissions
• Tips (including PhorestTips)

Avoiding Double Taxation

To help avoid the IRS treating your 1099-K as additional untaxed income, you can follow these simple steps:

1. When filing your taxes, complete Form 1040, Schedule 1.
2. On Schedule 1, you can declare that the income reported on the 1099-K has already been included in your W-2 and taxed appropriately.

How to Complete Form 1040 Schedule 1 for PhorestTips

If you receive a 1099-K from Phorest via Stripe for tip income earned through PhorestTips, and your employer has already reported and taxed those tips via your W-2, you can prevent double taxation by using Form 1040 Schedule 1 when filing your personal taxes:

On Schedule 1, Line 8z (Other Income):

• Enter the total amount from your 1099-K.
• Description: “PhorestTips reported on 1099-K”
  

On Schedule 1, Line 24z (Other Adjustments):

• Enter the same amount as a positive number.
• Description: “PhorestTips already included in W-2, taxes withheld”

This adjustment tells the IRS that the 1099-K income has already been accounted for and taxed through payroll.

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Need More Help?

If you have questions about how PhorestTips works or need help locating the Staff Tips report, feel free to get in touch below.