Do You Have to File Tips on Taxes?

All tips received are considered income and are subject to federal income tax. Understanding reporting requirements helps individuals meet tax obligations and ensures proper withholding.

Understanding Taxable Tips

A tip is a discretionary payment from a customer to an employee. This includes cash received directly from customers, tips left through electronic payment methods such as credit or debit cards, and the value of any noncash tips like tickets or other items of value. Tips also encompass amounts received through tip pools, tip splitting, or other formal or informal tip-sharing arrangements.

Payments categorized as service charges differ from tips. Service charges are mandatory amounts an employer requires a customer to pay, often added for large dining parties, banquet events, or room service. These charges are not considered tips because the customer does not have the unrestricted right to determine the amount or who receives the payment. Instead, distributed service charges are treated as regular wages and are subject to payroll taxes.

Reporting Tips to Your Employer

Employees who receive tips have specific responsibilities for reporting this income to their employer. If an employee receives $20 or more in cash and charged tips in a calendar month from a single employer, they must report the total amount of tips to that employer. This reporting helps the employer accurately calculate and withhold income tax, Social Security tax, and Medicare tax from the employee’s wages.

The report must be submitted to the employer by the 10th day of the month following the month in which the tips were received. For instance, tips earned in January must be reported by February 10th. If the 10th falls on a weekend or legal holiday, the deadline shifts to the next business day. Employees can provide a written statement containing essential information.

This statement should include the employee’s name, address, Social Security number, the employer’s name and address, the month or period covered, and the total tips received during that period. Employers use this information to ensure proper tax withholding and to report the tips on the employee’s Form W-2. Tips totaling less than $20 from a single employer in a month do not need to be reported to the employer, but they remain taxable income that must be reported on the individual’s annual tax return.

Reporting Tips on Your Income Tax Return

All tips received, regardless of the amount or whether they were reported to an employer, must be included on an individual’s annual income tax return. Tips that were reported to an employer are typically included in Box 1 (Wages, tips, other compensation) of Form W-2. Any tips not reported to an employer, such as those less than $20 in a month or noncash tips, must still be reported as income on Form 1040, U.S. Individual Income Tax Return, usually on Line 1a.

If an employee did not report all required tips to their employer, they must use Form 4137, Social Security and Medicare Tax on Unreported Tip Income. This form calculates and reports the Social Security and Medicare taxes owed on those amounts, ensuring the correct taxes are paid and the employee’s Social Security record accurately reflects their earnings.

Allocated tips, which appear in Box 8 of Form W-2, are amounts an employer assigns to an employee when the total reported tips fall below a certain percentage of gross receipts. These allocated tips are not included in Box 1 of the W-2 and no income tax, Social Security, or Medicare taxes are withheld on them by the employer. Individuals must report these allocated tips as income on their tax return using Form 4137, unless they have adequate records to prove they received less.

Individuals who are self-employed and receive tips, such as gig workers, report this income differently. Their tips are considered business income and are reported on Schedule C (Form 1040), Profit or Loss from Business. This income is then subject to self-employment tax, which covers Social Security and Medicare taxes for self-employed individuals.

Recordkeeping for Tipped Income

Maintaining accurate and detailed records of all tips received is important for compliance and financial planning. Employees should keep a daily record of their tips, documenting both cash tips and noncash tips. This includes tips received directly from customers, tips from electronic payment methods, and tips received from other employees through tip-sharing arrangements.

A daily tip log can be kept using a notebook, a spreadsheet, or a dedicated application. Employees can use any method that accurately captures the necessary information. Good recordkeeping helps ensure accurate reporting to both the employer and the Internal Revenue Service, supports income verification if questions arise, and assists in calculating any additional Social Security and Medicare tax that might be owed on unreported tips.