Tip reporting obligations
Tip adds to the employers responsibility. Tips belongs to employees. But still employers need to monitor the amount and report them with payroll. Often cases because taxes are deducted from the tips but tips are already distributed as cash, the net amount of payroll becomes very small for the employees especially if the tip they receive are substantial. In extreme cases their net amount can be 0 or even negative!
So naturally, employees will not want to report the entire amount on their payroll. But law is a law and employers need to monitor and report them. The IRS is looking into the reported tip percentage and if it is too low may penalize the business for underreporting.
Tax credit for employment tax on tips
When you report tips on the payroll, employment taxes (7.65%) will be returned to you as a credit of taxes. Essentially, the government is telling you that they will reimburse you for the employment taxes for the tips you report. This can be a big tax credit for you as an employer. Make sure you are taking advantage of this.