Tips are discretionary (optional or extra) payments determined by a customer that employees receive from customers.
Tips include:
- Cash tips received directly from customers.
- Tips from customers who leave a tip through electronic settlement or payment. This includes a credit card, debit card, gift card or any other electronic payment method.
- The value of any non-cash tips, such as tickets or other items of value.
- Tip amounts received from other employees paid out through tip pools, tip splitting, or other formal/informal tip sharing arrangement.
All cash and non-cash tips an received by an employee are income and are subject to Federal income taxes. All cash tips received by an employee in any calendar month are subject to Social Security and Medicare taxes and must be reported to the employer. If the total tips received by the employee during a single calendar month by a single employer are less than $20, then these tips are not required to be reported and taxes are not required to be withheld. Cash tips include tips received from customers, charged tips (for example, credit and debit card charges) distributed to the employee by the employee’s employer and tips received from other employees under any tip-sharing arrangement. Tips also include tips received by both directly and indirectly tipped employees.
Employee responsibilities
As an employee who receives tips, you must do three things:
- Keep a daily tip record.
- Report tips to the employer, unless the total is less than $20 per month per employer.
- Report all tips on an individual income tax return.
Keep a daily tip record;
Employees must keep a daily record of tips received. You can use Form 4070A, Employee’s Daily Record of Tips, included in Publication 1244, Employee’s Daily Record of Tips and Report of Tips to Employer. In addition to the information asked for on Form 4070A, you also need to keep a record of the date and value of any noncash tips you get, such as tickets, passes, or other items of value. Although you do not report these tips to your employer, you must report them on your tax return.
Report tips to the employer, unless the total is less than $20 per month per employer
The Internal Revenue Code requires employees to report (all cash tips received except for the tips from any month that do not total at least $20) to their employer in a written statement. Cash tips include tips received from customers, charged tips (for example, credit and debit card charges) distributed to the employee by his or her employer, and tips received from other employees under any tip-sharing arrangement. No particular form must be used; however, the statement must include:
- Employee signature,
- Employee’s name, address, and Social Security number,
- Employer’s name and address (establishment name if different),
- Month or period the report covers, and
- Total of tips received during the month or period.
The employee may use any document that has the above elements such as Form 4070, Employee’s Report of Tips to Employer, (available only in Publication 1244, a form that is provided by the employer or an electronic system provided by your employer to report your tips.
Both directly and indirectly tipped employees must report tips to the employer.
Report all tips on an individual income tax return
An employee must use Form 4137, Social Security and Medicare Tax on Unreported Tip Income, to report the amount of any unreported tip income to include as additional wages on their Form 1040, U.S. Individual Income Tax Return, or Form 1040-SR, U.S. Tax Return for Seniors, and the employee share of Social Security and Medicare tax owed on those tips.
When to report tips to your employer
Employees must report tips to the employer by the 10th of the month after the month the tips are received. For example, tips received by an employee in August 2020 are required to be reported by the employee to the employer on or before September 10, 2020. If the 10th falls on a Saturday, Sunday, or legal holiday, an employee may give the report to the employer by the next day that is not a Saturday, Sunday, or legal holiday. An employer may require employees to report tips more than once a month; however, the statement cannot cover a period of more than 1 calendar month.
The employer has multiple obligations regarding employee tip income including recordkeeping and reporting responsibilities, collecting taxes on tips, filing certain forms and paying or depositing taxes.
Employers are required to retain employee tip reports. Employers are also required to withhold taxes (including income taxes and the employee’s share of Social Security tax and Medicare tax) based upon wages and tip income received by the employee and to deposit this tax. In addition, employers are required to pay the employer share of Social Security and Medicare taxes based on the total wages paid to tipped employees as well as the reported tip income. This information and tax are finally reported to the IRS on the appropriate forms by the employer. Source