Tips are Subject to Taxes
Do you work at a hair salon, barber shop, casino, golf course, hotel or restaurant or drive a taxicab? The tip income you receive as an employee from those and other services is taxable income.
Here are some tips about tips:
- Tips are taxable. Tips are subject to federal income, Social Security and Medicare taxes, and may be subject to state income tax as well. The value of non–cash tips, such as tickets, passes or other items of value, is also income and subject to federal income tax.
- Include tips on your tax return. You must include in gross income all cash tips you receive directly from customers, tips added to credit cards, and your share of any tips you receive under a tip–splitting arrangement with fellow employees.
- Report tips to your employer. If you receive $20 or more in tips in any one month, you should report all your tips to your employer. Your employer is required to withhold federal income, Social Security and Medicare taxes.
- Keep a running daily log of your tip income. You can use IRS Publication 1244, Employee's Daily Record of Tips and Report to Employer, to record your tip income. For a free copy of Publication 1244, call the IRS toll free at 800-TAX-FORM (800-829-3676).
For more information, check out IRS Publication 531, Reporting Tip Income, or Publication 3148, Tips on Tips. They are available by calling 800-TAX-FORM (800-829-3676) or by going to the IRS Web site at IRS.gov.
Topic 402 - Tips
All tips you receive are considered income and are subject to federal income tax. You must include in gross income all tips you receive directly from customers, tips from charge customers that are paid to you by your employer, and your share of any tips you receive under a tip–splitting arrangement with fellow employees. The value of non–cash tips, such as tickets, passes or other items of value, is also income and subject to federal income tax. If your employer reports allocated tips in Box 8 of your Form W-2 (PDF), you should report the allocated tips on Form 1040 (PDF), unless you have adequate records to show that you received a different amount. Do not include as a tip any service charge that your employer adds to a customer's bill and then pays to you and treats as part of your wages.
If you receive tips of $20 or more in any one month from any one job, you must report the total tips to that employer by the tenth day of the next month.
You must report tips to your employer so your employer can withhold federal income tax and social security and Medicare taxes or railroad retirement tax on your tips. Any tips you reported to your employer are included in the wages on your Form W–2. Report to your employer only cash, check, or credit card tips you receive.
If you did not report tips to your employer, you must report them as income on your return, and you may owe social security and Medicare taxes on them. Complete Form 4137 (PDF), Social Security and Medicare Tax On Unreported Tip Income, and attach the form to your return. Include the amounts from Form 4137 on the appropriate lines of Form 1040. If you do not report tips to your employer as required, you may be subject to a penalty equal to 50% of the employees' Social Security and Medicare taxes, or Railroad Retirement taxes, in addition to the tax you owe. If you are an employee subject to the Railroad Retirement Tax Act, do not file Form 4137 or pay the tax with your income tax return, instead contact your employer. Your employer will collect the tax. If your employer is unable to collect all your social security and Medicare taxes at the end of the year, the uncollected amount will be shown in Box 12 of Form W-2. File Form 1040 and include the taxes in your total tax amount and write "UT" and the total on the dotted line.
If you receive tips of less than $20 during any one month from any one job, you do not have to report these tips to that employer, but you must include the tips in your income.
For more information, refer to Publication 531, Reporting Tip Income.
Publication 1244 (PDF), which contains Form 4070A, Employee's Daily Record of Tips to Employer, and Form 4070, Employee's Report of Tips to Employer, should also be helpful to you.
Topic 761 - Tips – Withholding and Reporting
Your employees who receive tips of $20 or more in a calendar month, while working for you, are required to report to you the total amount of tips they receive. They must give you written reports by the tenth of the following month. Employees who receive tips of less than $20 in a calendar month are not required to report their tips to you.
Employees must report to you tips received directly from customers, tips from other employees, and tips customers charge to their bills. Service charges added to a bill and paid to your employees are not considered tips for tax reporting purposes.
Employees can use , Form 4070A, Employee's Daily Record of Tips, to keep a daily record of their tips and Form 4070, Employee's Report of Tips to Employer, to report their tips to you. Both of these forms are in Publication 1244 (PDF), Employee's Daily Record of Tips and Report to Employer.
When you receive the tip report from your employee, use it to figure the amount of social security, medicare, and income taxes to withhold for the pay period on both wages and reported tips. You are responsible for paying the employer's portion of the Social Security and Medicare tax. You must collect the employee's portion of the Social Security and Medicare taxes and the income tax. You can collect these taxes from the employee's wages or from other funds the employee gives you up to the close of the calendar year. If you don't have enough money from the employee's wages and other funds, apply them in the following order. First, withhold all taxes due on regular wages. Second, withhold Social Security and Medicare taxes due on reported tips. Finally withhold any federal, state or local income tax on reported tips. You can withhold any remaining unpaid taxes from the employee's next paycheck. If you cannot collect all of the employee's Social Security and Medicare taxes on tips, show the uncollected amount in the appropriate box on the employee's Form W-2, Wage and Tax Statement. Also, show the uncollected amount as an adjustment on your Form 941 (PDF), Employer's Quarterly Federal Tax Return.
When preparing your employee's Form W–2, include wages, tips and other compensation in the box labeled "Wages, tips, other compensation". Include Medicare wages and tips, and Social Security tips in their appropriate boxes.
When figuring your liability for federal unemployment tax, add the reported tips to your employee's wages.
If you operate a large food or beverage establishment where tipping is customary and you normally employ more than ten people on a typical business day, you must file Form 8027 (PDF), Employer's Annual Information Return of Tips Income and Allocated Tips, for each calendar year. If you have more than one food or beverage operation, you must file a separate Form 8027 for each. Form 8027 is due on the last day of February of the next year (or March 31st if you are filing electronically) and is filed with the appropriate service center.
If the total tips reported by all employees are less than 8 percent of your gross receipts (unless a lower rate has been approved by the IRS), you must allocate the difference among the employees who received tips. The allocation may be based on each employee's share of gross receipts or share of total hours worked, or on a written agreement between you and your employees. Show the amount allocated in the box labeled, "Allocated Tips", of the employee's Form W–2. Do not withhold income, Social Security or Medicare taxes on allocated tips.
If you are required to allocate tips, your employees must continue to report all tips to you, and you must use the amounts they report to figure payroll taxes.
For more information on employer responsibilities, refer to Publication 15, Circular E, Employer's Tax Guide. For more information on employee responsibilities, refer to Publication 531, Reporting Tip Income or Publication 1872 (PDF), Tips on Tips.
Frequently Asked Tax Questions And Answers on Tips and Allocated Tips
4.12 Interest/Dividends/Other Types of Income: Tips
Of my allocated tips, I tip-out 15% to the busboy and 5% to the bar. Where do I deduct this on my tax return?You cannot deduct tip-outs (the tips you split with other employees) on your tax return. Nor can you deduct them from your allocated tips. The practice of tipping-out is one of the reasons you should keep a detailed daily log of your tips. If you documented that you tip-out, and you reported all your tips to your employer, then you do not include in your income the allocated tips in box 8 of Form W-2 (PDF).
Tipping-out, by itself, should not cause an allocated tip situation. First, when you report the cash tips you receive, you should report the total tips, then the amount tipped-out. Publication 1244 (PDF), Employee's Daily Record of Tips and Report to Employer, includes Forms 4070 and 4070A, Employee's Report of Tips to Employer that provides lines to record:
- Cash tips received
- Credit card tips received
- Tips paid out
- Net tips
The detail of the information provided should enable your employer to develop a reasonable, fair, and accurate method for determining whether tips need to be allocated, and, if so, how much. Employers who operate large food and beverage establishments are only required to allocate tips if the total tips reported by all the employees who customarily receive tips are less than 8% of gross sales. Thus, when there is a tip-splitting arrangement, it is important that all tips, including those received through tip-splitting, be reported to the employer by each employee who receives $20 or more in a month.
For more information, refer to Publication 531, Reporting Tip Income.
References:
- Publication 1872 (PDF), Tips on Tips - A Guide to Tip Income Reporting for Employees in the Food and Beverage Industry
- Publication 531, Reporting Tip Income
- Publication 1244 (PDF), Employee's Daily Record of Tips and Report to Employer
- Tax Topic 402, Tips
12.3 Small Business/Self-Employed/Other Business : Form W–2, FICA, Medicare, Tips, Employee Benefits
As an employer, do I have any liability if my employees receive tips but don't report them to me?Employees who customarily receive tips are required to report their cash tips to their employers at least monthly, if they receive $20 or more in the month. Cash tips are tips received directly in cash or by check, and charged tips. You have a liability to withhold and pay Social Security and Medicare tax on your employees' reported tips, to the extent that wages or other employee funds are available. If the employee does not report tips to you, it places you at risk of possible assessment of the employer's share of the Social Security and Medicare taxes on the unreported tips. If you are a large food or beverage establishment (more than 10 employees on a typical day and food or beverages consumed on the premises), you are required to allocate tips if the total tips reported to you are less than 8% of gross sales. Report the allocated amount on the employee's W-2 at the end of the year.
References:
- Publication 15, Circular E, Employer's Tax Guide
- Publication 531, Reporting Tip Income
- Publication 1872 (PDF), Tips on Tips - A Guide to Tip Income Reporting for Employees in the Food and Beverage Industry
- Tax Topic 761, Tips - Withholding & Reporting
No. Tip allocation is required when the amount of tips reported by employees of a large food or beverage establishment is less than 8% (or an approved lower rate) of the gross receipts, other than nonallocable receipts, for the given period. If the employees are reporting more than the 8%, there would be no allocated tip amount. However, the employer must still file Form 8027 (PDF), Employer's Annual Information Return of Tip Income and Allocated Tips.
References:
- Form 8027 (PDF), Employer's Annual Information Return of Tip Income and Allocated Tips
- Form 8027 Instructions, Employer's Annual Information Return of Tip Income and Allocated Tips
- Publication 15, Circular E, Employer's Tax Guide
- Publication 1872 (PDF), Tips on Tips - A Guide to Tip Income Reporting for Employees in the Food and Beverage Industry
- Tax Topic 402, Tips
Links:
- Publication 1244, Employee's Daily Record of Tips and Report of Tips to Employer (PDF 38K)
- Publication 531, Reporting Tip Income (PDF 93K)
- Publication 3148, Tips on Tips for Employees (PDF 629K)
- Tax Topic 402, Tips
