Introduction
This publication is for employees who receive tips.
All tips you receive are income and are subject to federal income tax. You must include in gross income all tips you receive directly, charged tips paid to you by your employer, and your share of any tips you receive under a tip-splitting or tip-pooling arrangement.
The value of noncash tips, such as tickets, passes, or other items of value are also income and subject to tax.
Reporting your tip income correctly is not difficult. You must dothree things.
- Keep a daily tip record.
- Report tips to your employer.
- Report all your tips on your income tax return.
This publication will explain these three things and show you what to do on your tax return if you have not done the first two. This publication will also show you how to treat allocated tips.
Keeping a Daily Tip Record
Why keep a daily tip record? You must keep a daily tip record so you can:- Report your tips accurately to your employer,
- Report your tips accurately on your tax return, and
- Prove your tip income if your return is ever questioned.
How to keep a daily tip record
There are two ways to keep a daily tip record. You can either:
- Write information about your tips in a tip diary, or
- Keep copies of documents that show your tips, such as restaurant bills and credit card charge slips.
Sample Filled-in Form 4070A from Publication 1244
Sample Filled-in Form 4070A from Publication 1244. The graphic shows a sample filled-in Form 4070A.
| “Employee's name and address” field contains | |||
| |||
| “Employer's name” field contains Diamond Restaurant | |||
| “Month and year” field contains October 2007 |
The following is a description of records 1 through 5.
| Date tips received | Date of entry | a. Tips received directly from customers and other employees | b. Credit card tips received | c. Tips paid out to other employees | d. Names of employees to whom you paid tips |
|---|---|---|---|---|---|
| 1 | 10/3 | Off | |||
| 2 | 10/3 | 48.80 | 26.40 | 15.20 | Judy Brown |
| 3 | 10/3 | 28.00 | 21.60 | 8.00 | Carl Jones |
| 4 | 10/5 | 42.00 | 24.00 | 10.00 | Judy Brown |
| 5 | 10/7 | 40.80 | 28.00 | 12.00 | Judy Brown and Brian Smith |
| Subtotals | blank | 159.60 | 100.00 | 45.20 | blank |
The following is a description of records 6 through 15.
| Date tips received | Date of entry | a. Tips received directly from customers and other employees | b. Credit card tips received | c. Tips paid out to other employees | d. Names of employees to whom you paid tips |
|---|---|---|---|---|---|
| 6 | 10/7 | Off | |||
| 7 | 10/8 | 37.20 | 22.40 | 8.00 | Carl Jones |
| 8 | 10/9 | 50.80 | 17.20 | 10.00 | Judy Brown and Carl Jones |
| 9 | 10/9 | 33.60 | 16.40 | 8.00 | Judy Brown |
| 10 | 10/11 | 30.40 | 22.00 | 9.20 | Judy Brown |
| 11 | 10/11 | 42.00 | 11.60 | 8.80 | Carl Jones |
| 12 | 10/14 | 35.60 | 16.00 | 7.60 | Judy Brown |
| 13 | 10/14 | Off | |||
| 14 | 10/14 | 48.40 | 14.40 | 12.40 | Judy Brown and Brian Smith |
| 15 | 10/16 | 45.20 | 32.00 | 17.20 | Brian Smith |
| Subtotals | blank | 323.20 | 152.00 | 81.20 | blank |
The following is a description of records16 through 25.
| Date tips received | Date of entry | a. Tips received directly from customers and other employees | b. Credit card tips received | c. Tips paid out to other employees | d. Names of employees to whom you paid tips |
|---|---|---|---|---|---|
| 16 | 10/16 | 41.20 | 18.40 | 8.80 | Judy Brown |
| 17 | 10/18 | 39.20 | 21.20 | 9.60 | Judy Brown |
| 18 | 10/19 | 46.80 | 12.80 | 8.40 | Carl Jones |
| 19 | 10/21 | 34.00 | 19.20 | 10.00 | Judy Brown |
| 20 | 10/21 | Off | |||
| 21 | 10/22 | 34.80 | 26.00 | 12.80 | Judy Brown and Brian Smith |
| 22 | 10/24 | 42.40 | 22.80 | 12.40 | Carl Jones |
| 23 | 10/24 | 48.80 | 17.20 | 13.60 | Judy Brown |
| 24 | 10/25 | 33.60 | 19.20 | 10.80 | Brian Smith |
| 25 | 10/26 | 37.20 | 14.80 | 9.20 | Judy Brown |
| Subtotals | blank | 358.00 | 171.60 | 95.60 | blank |
The following is a description of records 26 through 31 and the total tips for the month of October.
| Date tips received | Date of entry | a. Tips received directly from customers and other employees | b. Credit card tips received | c. Tips paid out to other employees | d. Names of employees to whom you paid tips |
|---|---|---|---|---|---|
| 26 | 10/26 | 31.60 | 11.60 | 12.40 | Judy Brown |
| 27 | 10/27 | Off | |||
| 28 | 10/29 | 43.20 | 14.00 | 12.80 | Carl Jones |
| 29 | 10/30 | 34.80 | 22.40 | 7.20 | Carl Jones |
| 30 | 10/31 | 46.00 | 27.20 | 12.80 | Judy Brown and Brian Smith |
| 31 | 11/2 | 27.60 | 20.40 | 6.40 | Judy Brown |
| Subtotals from pages 1, 2, and 3 | blank | (page 1) 159.60, (page 2) 323.20, (page 3) 358.00 | (page 1) 100.00, (page 2) 152.00, (page 3) 171.60 | (page 1) 45.20, (page 2) 81.20, (page 3) 95.60 | blank |
| Totals | blank | 1,024.00 | 519.20 | 273.60 | blank |
If you do not use Form 4070A, start your records by writing your name, your employer's name, and the name of the business (if it is different from your employer's name). Then, each workday, write the date and the following information.
- Cash tips you get directly from customers or from other employees.
- Tips from credit card charge customers that your employer pays you. (Also include tips from debit card charge customers.)
- The value of any noncash tips you get, such as tickets, passes, or other items of value.
- The amount of tips you paid out to other employees through tip pools or tip splitting, or other arrangements, and the names of the employees to whom you paid the tips.
Filled-in Form 4070
Electronic tip record
You can use an electronic system provided by your employer to record your daily tips. If you do, you must receive and keep a paper copy of this record.
Reporting Tips to Your Employer
Why report tips to your employer? You must report tips to your employer so that:- Your employer can withhold federal income tax and social security and Medicare taxes or railroad retirement tax,
- Your employer can report the correct amount of your earnings to the Social Security Administration or Railroad Retirement Board (which affects your benefits when you retire or if you become disabled, or your family's benefits if you die), and
- You can avoid the penalty for not reporting tips to your employer (explained later).
What tips to report
Report to your employer only cash, check, debit, or credit card tips you receive. If your total tips for any one month from any one job are less than $20, do not report the tips for that month to that employer. If you participate in a tip-splitting or tip-pooling arrangement, report only the tips you receive and retain. Do not report to your employer any portion of the tips you receive that you pass on to other employees. Do not report the value of any noncash tips, such as tickets or passes, to your employer. You do not pay social security and Medicare taxes or railroad retirement tax on these tips.
How to report
If your employer does not give you any other way to report your tips, you can use Form 4070, Employee's Report of Tips to Employer. Fill in the information asked for on the form, sign and date the form, and give it to your employer. A sample filled-in Form 4070 is shown on this page. To get a 1-year supply of the form, ask the IRS or your employer for Publication 1244. If you do not use Form 4070, give your employer a statement with the following information.
- Your name, address, and social security number.
- Your employer's name, address, and business name (if it is different from your employer's name).
- The month (or the dates of any shorter period) in which you received tips.
- The total tips required to be reported for that period.
Electronic tip statement
Your employer can have you furnish your tip statements electronically.
When to report
Give your report for each month to your employer by the 10th of the next month. If the 10th falls on a Saturday, Sunday, or legal holiday, give your employer the report by the next day that is not a Saturday, Sunday, or legal holiday.
Example —
You must report your tips received in April 2008 by May 12, 2008. May 10th is on a Saturday, and the 12th is the next day that is not a Saturday, Sunday, or legal holiday.
Example —
You must report your tips received in May 2008 by June 10, 2008.
Final report
If your employment ends during the month, you can report your tips when your employment ends.
Penalty for not reporting tips
If you do not report tips to your employer as required, you may be subject to a penalty equal to 50% of the social security and Medicare taxes or railroad retirement tax you owe on the unreported tips. (For information about these taxes, see Reporting social security and Medicare taxes on tips not reported to your employer under Reporting Tips on Your Tax Return, later.) The penalty amount is in addition to the taxes you owe. You can avoid this penalty if you can show reasonable cause for not reporting the tips to your employer. To do so, attach a statement to your return explaining why you did not report them.
Giving your employer money for taxes
Your regular pay may not be enough for your employer to withhold all the taxes you owe on your regular pay plus your reported tips. If this happens, you can give your employer money until the close of the calendar year to pay the rest of the taxes. If you do not give your employer enough money, your employer will apply your regular pay and any money you give to the taxes, in the following order.
- All taxes on your regular pay.
- Social security and Medicare taxes or railroad retirement tax on your reported tips.
- Federal, state, and local income taxes on your reported tips.
Tip Rate Determination and Education Program
Your employer may participate in the Tip Rate Determination and Education Program. The program was developed to help employees and employers understand and meet their tip reporting responsibilities.
There are two agreements under the program: the Tip Rate Determination Agreement (TRDA) and the Tip Reporting Alternative Commitment (TRAC). In addition, employers in the food and beverage industry may be able to get approval of an employer-designed EmTRAC program. For information on the EmTRAC program, see Notice 2001-1, which is on page 261 of Internal Revenue Bulletin 2001-2 at www.irs.gov/pub/irs-irbs/irb01-02.pdf.
If you are employed in the gaming industry, your employer may have a Gaming Industry Tip Compliance Agreement Program. See Revenue Procedure 2007-32, which is on page 1322 of Internal Revenue Bulletin No. 2007-22 at www.irs.gov/pub/irs-irbs/irb07-22.pdf.
If you are employed in the food and beverage industry, your employer may participate in an Attributed Tip Income Program (ATIP). See Revenue Procedure 2006-30, which is on page 110 of Internal Revenue Bulletin No. 2006-31 at www.irs.gov/pub/irs-irbs/irb06-31.pdf">www.irs.gov/pub/irs-irbs/irb06-31.pdf.
Your employer can provide you with a copy of any applicable agreement. To find out more about these agreements, visit www.irs.gov and type “restaurant tip reporting” in the Keyword search box. You may also call 1-800-829-4933 or visit www.irs.gov/localcontacts for the IRS Taxpayer Assistance Center in your area; or send an email to Tip.Program@irs.gov and request information on this program.
Reporting Tips on Your Tax Return
How to report tips
Report your tips with your wages on line 1 of Form 1040EZ or line 7 of Form 1040A or Form 1040.
What tips to report
You must report all tips you received in 2007 on your tax return, including both cash tips and noncash tips. Any tips you reported to your employer for 2007 are included in the wages shown in box 1 of your Form W-2. Add to the amount in box 1 only the tips you did not report to your employer. If you received $20 or more in cash and charge tips in a month and did not report all of those tips to your employer, see Reporting social security and Medicare taxes on tips not reported to your employer , later. If you did not keep a daily tip record as required and an amount is shown in box 8 of your Form W-2, see Allocated Tips , later. If you kept a daily tip record and reported tips to your employer as required under the rules explained earlier, add the following tips to the amount in box 1 of your Form W-2.
- Cash and charge tips you received that totaled less than $20 for any month.
- The value of noncash tips, such as tickets, passes, or other items of value.
Example —
John Allen began working at the Diamond Restaurant (his only employer in 2007) on June 30 and received $10,000 in wages during the year. John kept a daily tip record showing that his tips for June were $18 and his tips for the rest of the year totaled $7,000. He was not required to report his June tips to his employer, but he reported all of the rest of his tips to his employer as required. The sample filled-in forms on page 2 and page 3 show his daily tip record (Form 4070A) and his report to his employer (Form 4070) for October.
John's Form W-2 from Diamond Restaurant shows $17,000 ($10,000 wages + $7,000 reported tips) in box 1. He adds the $18 unreported tips to that amount and reports $17,018 as wages on his tax return.
Reporting social security and Medicare taxes on tips not reported to your employer
If you received $20 or more in cash and charge tips in a month from any one job and did not report all of those tips to your employer, you must report the social security and Medicare taxes on the unreported tips as additional tax on your return. To report these taxes, you must file a return even if you would not otherwise have to file. You must use Form 1040. (You cannot file Form 1040EZ or Form 1040A.) Use Form 4137, Social Security and Medicare Tax on Unreported Tip Income, to figure these taxes. Enter the tax on line 59, Form 1040, and attach the Form 4137 to your return. If you are subject to the Railroad Retirement Tax Act, you cannot use Form 4137 to pay railroad retirement tax on unreported tips. To get railroad retirement credit, you must report tips to your employer.
Reporting uncollected social security and Medicare taxes on tips
If your employer could not collect all the social security and Medicare taxes or railroad retirement tax you owe on tips reported for 2007, the uncollected taxes will be shown in box 12 of your Form W-2 (codes A and B). You must report these amounts as additional tax on your return. You may have uncollected taxes if your regular pay was not enough for your employer to withhold all the taxes you owe and you did not give your employer enough money to pay the rest of the taxes. To report these uncollected taxes, you must file a return even if you would not otherwise have to file. You must use Form 1040. (You cannot file Form 1040EZ or Form 1040A.) Include the taxes in your total tax amount on line 63, and enter “UT” and the total of the uncollected taxes on the dotted line next to line 63. Self-employed persons. If you receive tips as a self-employed person, you should report these tips as income on Schedule C or C-EZ. See Publication 334, Tax Guide for Small Business, for more information on reporting business income.
Allocated Tips
If your employer allocated tips to you, they are shown separately in box 8 of your Form W-2. They are not included in box 1 with your wages and reported tips. If box 8 is blank, this discussion does not apply to you.
What are allocated tips? These are tips that your employer assigned to you in addition to the tips you reported to your employer for the year. Your employer will have done this only if:- You worked in a restaurant, cocktail lounge, or similar business that must allocate tips to employees,
- The tips you reported to your employer were less than your share of 8% of food and drink sales, and
- You did not participate in your employer's Attributed Tip Income Program (ATIP).
- You kept a daily tip record, or other evidence that is as credible and as reliable as a daily tip record, as required under rules explained earlier.
- Your tip record is incomplete, but it shows that your actual tips were more than the tips you reported to your employer plus the allocated tips.
How to report allocated tips
If you must report allocated tips on your return, add the amount in box 8 of your Form W-2 to the amount in box 1. Report the total as wages on line 7 of Form 1040. (You cannot file Form 1040EZ or Form 1040A.) Because social security and Medicare taxes were not withheld from the allocated tips, you must report those taxes as additional tax on your return. Complete Form 4137, and include the allocated tips on line 1 of the form. See Reporting social security and Medicare taxes on tips not reported to your employer under Reporting Tips on Your Tax Return, earlier.
How to request an approved lower rate
Your employer can use a tip rate lower than 8% (but not lower than 2%) to figure allocated tips only if the IRS approves the lower rate. Either the employer or the employees can request approval of a lower rate by filing a petition with the IRS. The petition must include specific information about the business that will justify the lower rate. A user fee must be paid with the petition. An employee petition can be filed only with the consent of a majority of the directly-tipped employees (waiters, bartenders, and others who receive tips directly from customers). The petition must state the total number of directly-tipped employees and the number of employees consenting to the petition. Employees filing the petition must promptly notify the employer, and the employer must promptly give the IRS a copy of any Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips, filed by the employer for the previous 3 years. For more information about how to file a petition and what information to include, see Allocation of Tips in the instructions for Form 8027.
