People who work in companies or organizations as tipped employees, ought to report both their regular income and their tips from each shift as income. If you are employed as a waiter or waitress, a casino poker dealer, a valet, bus boy, or as another commonly tipped worker, it is essential that you know how and when to report your tips to your employer and to the IRS. What is a Tip? A tip is any charitable payment that you receive from a customer or client. A tip can take the form of:
  • Cash
  • Checks
  • Credit Card charges
  • Non-monetary gifts like a movie tickets, bus passes, or other goods
Businesses that permit customers to tip are not permitted by law to determine the amount or the frequency with which customers tip. If a business does authorize tipping, this money can instead be considered a service charge by the IRS, which will not entail that you report it as a tip. Reporting tip income Employees must report all cash tips received to the employer, except the sum of total tips is less than $20 for a given month.  Employees need to report tips to the employer by the 10th of the month after the month the tips are received. Noncash tips received from customers are not to be reported to the employer. All cash and noncash tips are required to be included in the employee’s gross income and are subject to tax.  Both direct tips and indirect tips (e.g. bussers and cooks) must be reported to the employer, but you can lower the number of reportable tips you share with other employees.  For instance, if you receive a $150 tip and give the bartender $25, you would only report $125. Employer requirements:
  • Retain employee tip reports
  • Withhold income taxes and the employee’s share of FICA taxes
  • Pay employer’s share of FICA taxes
  • File Form 941, Employer’s Quarterly Federal Tax Return along with federal deposits
  • Include tip income on Form W-2, Box 1 (Wages, tips & other compensation), Box 5 (Medicare wages and tips) and Box 7 (Social Security tips)
Large food or beverage establishments An employer who manages a large food or beverage establishment must file Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips.  The report contains receipts from food and beverages, tips reported by employees and allocated tips. An establishment is considered a large food or beverage establishment if all of the following requirements are met:
  • The operation is located in the 50 states or D.C.
  • Food or beverages are provided for consumption on the premises, excluding fast food operations
  • Tipping employees for food or beverages by customers is customary
  • The employer normally employed more than 10 employees on a typical business day during the preceding calendar year
Employer’s share of Social Security & Medicare taxes on unreported tips If employees do not report their tips to the employer, the employer is not responsible for the employer’s share of Social Security and Medicare taxes (FICA) on the unreported tip until the IRS notifies and demands the taxes.  The employer is not liable to withhold and pay the employee’s share of Social Security and Medicare taxes on the unreported tip income. Voluntary tip compliance agreements The IRS has established voluntary tip compliance agreements for industries where tipping is usual, such as restaurants and bars.  Among the advantages, the agreements help the employer and employee understand and meet their tax duties through education, instead of through enforcement and examination actions by the IRS. When to Report Tips If your employer requires a compulsory gratuity on guest tickets or charges extra for takeout orders, for instance, it is not under any obligation to report this extra money as tips. Even if the employer shares the service charges or gratuity among the employees, you do not have to report the money as a tip, but rather as part of your regular income. Similarly, if your tips are less than $20 for the money, you are not duty-bound to report the money to your employer. It is only when you make more than $20 that you have to report the initial $20 plus anything additional to the IRS and to the company for which you work. If you do make above $20 in tips, you are required to fill out the IRS Form 4070 and submit it to your boss. This form must be filled and submitted by the 10th of each month. It allows your employer to withhold money for:
  • Medicare
  • FICA
  • Social Security
  • State taxes
How to Report Tips Your employer ought to have the IRS Form 4070 on hand for you to fill out by the 10th of each month. If not, you must put in writing these details so that you can be recognized with legally and accurately reporting your tips:
  • Your full legal name
  • Your legal address
  • The amount of your month’s tips
  • Your employer’s name and address
  • Your Social Security Number
  • The month for when the tips were collected
  • Your signature
  • The date that the form was submitted
  • After you write out these details, you should then give it to your employer or your human resource manager.
Why to Report Your Tips Each Month Employees such as waitresses and valets who are tipped can end each shift with a handful of cash. It may be very enticing to under-report your tips because you want to conceal as many of them as you can without having to pay your employer the fair share. However, it is important that you report the full amount accurately and sincerely. If you do not report the full amount, you could face serious penalties that could include having your future earnings levied to pay off the amount that you owe the IRS. Likewise, the IRS could withhold up to half of your Social Security and still request that you pay the delinquent amount in full. The amount of money that you report also plays into how much Social Security you and your loved ones can legally receive once retired or if you become injured or in the case of death. Reporting the full amount that you make each month allows you to collect more of your Social Security benefits when you become qualified for them. Tipped employees must report their tips and earnings to the IRS. You can act in accordance with the IRS by knowing what monies to report and how and when to do so.