This chapter 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, is also income and subject to tax.
Reporting your tip income correctly is not difficult. You must do three things.
-
Keep a daily tip record.
-
Report tips to your employer.
-
Report all your tips on your income tax return.
This chapter will explain these three things and show you what to do on your tax return if you have not done the first two.
This chapter will also show you how to treat allocated tips.
For information on special tip programs and agreements, see Publication 531.
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 or debit card charge slips.
You should keep your daily tip record with
your tax or other personal records. You must keep your records for as
long as they
are important for administration of the federal
tax law. For information on how long to keep records, see
How long to keep records
in chapter 1.
If you keep a tip diary, you can use Form 4070A, Employee's Daily Record of Tips. To get Form 4070A, ask the Internal Revenue
Service (IRS) or your employer for Publication 1244. Also, Publication 1244 is available online at
www.irs.gov/pub/irs-pdf/p1244.pdf. Publication 1244 includes a 1-year supply of Form 4070A. Each day, write in the information asked for on the form.
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.
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 and debit card charge customers that your employer pays you.
-
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.
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.
Service charges.
Do not write in your tip diary the amount of any service charge that your employer adds to a customer's bill and then pays
to you and treats as wages. This is part of your wages, not a tip. See examples below.
Example 1.
Good Food Restaurant adds an 18% charge to
the bill for parties of 6 or more customers. Jane’s bill for food and
beverages
for her party of 8 includes an amount on
the tip line equal to 18% of the charges for food and beverages, and the
total includes
this amount. Because Jane did not have an
unrestricted right to determine the amount on the “tip line,” the 18% charge is considered a service charge. Do not include the 18% charge in your tip diary. Service charges that are
paid to you are considered wages, not tips.
Example 2.
Good Food Restaurant also includes sample calculations of tip amounts at the bottom of its bills for food and beverages provided
to customers. David’s bill includes a blank “tip line,” with sample tip calculations of 15%, 18%, and 20% of his charges for food and beverages at the bottom of the bill beneath
the signature line. Because David is free to enter any amount on the “tip line” or leave it blank, any amount he includes is considered a tip. Be sure to include this amount in your tip diary.
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, and debit and credit card tips you receive.
If your total tips for any 1
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. However, you must
report
tips you receive from 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 tips, you can
use Form 4070. Fill in the information asked for
on the form, sign and date the form, and give it
to your employer. 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.
You must sign and date the statement. Be sure to keep a copy with your tax or other personal records.
Your employer may require you
to report your tips more than once a month. However, the statement
cannot cover a period
of more than 1 calendar month.
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 1.
You must report your tips received in October 2012 by November 13, 2012. November 10 is a Saturday, and the 13th is the next
day that is not a Saturday, Sunday, or legal holiday.
Example 2.
You must report your tips received in September 2012 by October 10, 2012.
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 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.
Any
taxes that remain unpaid can be collected by your employer from your
next paycheck. If withholding taxes remain uncollected
at the end of the year, you may be subject to a
penalty for underpayment of estimated taxes. See Publication 505, Tax
Withholding
and Estimated Tax, for more information.
Uncollected taxes.
You must report on your tax return any social security and Medicare taxes or railroad retirement tax that remained uncollected
at the end of 2011. These uncollected taxes will be shown on your 2011 Form W-2. See
Reporting uncollected social security and Medicare taxes on tips reported to your employer under Reporting Tips on Your Tax Return, later.
Reporting Tips on Your Tax Return
How to report tips.
Report your tips with your wages on Form 1040, line 7; Form 1040A, line 7; or Form 1040EZ, line 1.
What tips to report.
You must report all tips you
received in 2011 on your tax return, including both cash tips and
noncash tips. Any tips
you reported to your employer for 2011 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.
Ben Smith began working at the Blue Ocean
Restaurant (his only employer in 2011) on June 30 and received $10,000
in wages
during the year. Ben 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.
Ben's Form W-2 from Blue Ocean Restaurant shows $17,000 ($10,000 wages plus $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 to figure these taxes. Enter the tax on your return as instructed, and attach the completed 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 reported to your employer.
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. For more information, see
Giving your employer money for taxes
, under
Reporting Tips to Your Employer, earlier.
If your employer could not
collect all the social security and Medicare taxes or railroad
retirement tax you owe on
tips reported for 2011, 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.
To report these uncollected taxes, you must file a return even if you would not otherwise have to file. Include the taxes
in your total tax amount on Form 1040, line 60, and write “
UT” and the total of the uncollected taxes in the space next to line 60. (You cannot file Form 1040EZ or Form 1040A.)
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 an establishment (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).
No income, social security, or Medicare taxes are withheld on allocated tips.
How were your allocated tips figured.
The tips allocated to you are
your share of an amount figured by subtracting the reported tips of all
employees from
8% (or an approved lower rate) of food and drink
sales (other than carryout sales and sales with a service charge of 10%
or
more). Your share of that amount was figured
using either a method provided by an employer-employee agreement or a
method
provided by IRS regulations based on employees'
sales or hours worked. For information about the exact allocation method
used,
ask your employer.
Must you report your allocated tips on your tax return.
You must report all tips you
received in 2011 on your tax return, including both cash tips and
noncash tips. Any tips
you reported to your employer for 2011 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. This should include any allocated tips shown in box 8 on your
Form(s)
W-2, unless you have adequate records to show
that you received less tips in the year than the allocated figures.
See
What tips to report
under
Reporting Tips on Your Tax Return, and
Keeping a Daily Tip Record
, earlier.
How to report allocated tips.
Report the amount in box 1 and
the allocated tips in box 8 of your Form(s) W-2 as wages on Form 1040,
line 7; Form
1040NR, line 8; or Form 1040NR-EZ, line 3. (You
cannot file Form 1040A or Form 1040EZ when you have allocated tips.)
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.
