Do Servers Have to Claim Cash Tips?

Understanding the tax implications of cash tips is crucial for servers. Tips, whether direct or through tip-sharing, are income subject to federal tax regulations. Accurate reporting ensures tax compliance.

Requirement to Claim Tips

All tips, including cash, credit/debit card, and non-cash tips, are taxable income. They are subject to federal income, Social Security, and Medicare taxes.

The obligation to report tips applies whether received directly from customers or through tip pools. While non-cash tips are taxable, they do not need to be reported to an employer; they must still be included as income on an individual’s tax return. However, if cash tips received from a single employer in a calendar month amount to less than $20, they do not need to be reported to the employer, but they remain subject to federal income tax and must be reported on the employee’s annual tax return.

Reporting Tips to Your Employer

Servers must accurately track and report tips to their employer. This begins with maintaining a daily tip record, often referred to as a tip log. This log should include details such as the date, the amount of cash tips received, and the amount of charged tips.

This detailed record-keeping is important for ensuring all income is accounted for and for accurately reporting tips to the employer. Employees are generally required to report their total tips to their employer by the 10th day of the month following the month in which the tips were received. For this purpose, IRS Form 4070 can be utilized, which requires information such as the employee’s name, address, Social Security number, the employer’s name, and the total tips received for the period. This reported information allows employers to properly withhold taxes.

Employer’s Responsibilities for Tip Reporting

Once employees report their tips, employers assume specific responsibilities regarding these earnings. Employers are required to withhold federal income tax, Social Security tax, and Medicare tax from the reported tip income. These withheld amounts, along with the reported tips, are then included on the employee’s Form W-2, Wage and Tax Statement.

In certain food and beverage establishments, if the total tips reported by all employees are less than 8% of the establishment’s gross receipts, the employer must “allocate” the difference among the tipped employees. These allocated tips are reported separately in Box 8 of the employee’s Form W-2, but no income tax, Social Security, or Medicare taxes are withheld from these allocated amounts by the employer. Employers also have their own share of Social Security and Medicare taxes to pay on reported tips. Annually, large food or beverage establishments must file Form 8027 to report their gross receipts and the tips reported by employees.

Reporting Tips on Your Tax Return

When preparing an annual personal income tax return, tips that were reported to an employer are generally included in the wages shown on Form W-2, Box 1. These amounts are then automatically part of the income reported on the tax return. However, if a server received tips of $20 or more in a month but did not report them to their employer, these “unreported tips” must still be included as income on the tax return.

To account for Social Security and Medicare taxes on these unreported tips, individuals must file IRS Form 4137, “Social Security and Medicare Tax on Unreported Tip Income.” This form calculates the employee’s share of these taxes due on the unreported amounts. Additionally, any allocated tips shown in Box 8 of a Form W-2 generally need to be included as income on the tax return, and Form 4137 is used to figure any Social Security and Medicare taxes on these allocated tips. A server may not need to report the full allocated amount if they have adequate records to demonstrate they received less in tips than the allocated amount.