Do You Have to Report Tips on Taxes?

All tip income is taxable and must be reported to the Internal Revenue Service (IRS). This rule applies to every type of tip an employee receives, including cash, credit card gratuities, and portions from tip-pooling arrangements. Non-cash tips, such as event tickets or other items of value from a customer, are also considered reportable income. The responsibility for tracking and reporting this income falls on the employee.

Identifying and Tracking Tip Income

The IRS defines a tip as a voluntary payment a customer makes to an employee, which differs from a mandatory service charge an employer adds to a bill. For instance, an automatic 18% gratuity for a large party is a service charge, not a tip. Service charges are treated as regular wages by your employer, while tips have specific tracking and reporting rules you must follow.

If you participate in a tip-sharing arrangement, you must track the actual amount you receive. For non-cash tips, like a gift card, you are responsible for determining the item’s fair market value and reporting that amount as income.

You must maintain a daily record of the tips you receive. The IRS provides Form 4070A, Employee’s Daily Record of Tips, for this purpose. Your daily log should contain your name, your employer’s name, the date, and the total amount of tips received. This record is the basis for reporting tips to your employer and on your tax return.

Reporting Tips to Your Employer

If you receive $20 or more in tips during a calendar month from one job, you must report the total amount to that employer. This threshold applies on a per-employer basis. Failing to report your tips can lead to a penalty equal to 50% of the Social Security and Medicare taxes you owe on the unreported amount.

Reporting tips to your employer is for tax withholding purposes. When you provide your tip totals, your employer will withhold your share of Social Security and Medicare taxes from your regular pay. This process helps prevent a large tax bill when you file your return and ensures your reported tips are included on your year-end tax documents.

You must submit your tip report to your employer by the 10th day of the month after you received the tips. For example, tips received in June must be reported by July 10th. You can use IRS Form 4070, Employee’s Report of Tips to Employer, or a similar written statement that contains all the required information.

Understanding Your W-2 and Allocated Tips

Your Form W-2 summarizes your annual earnings, including reported tips. The total of your regular wages plus reported tips will appear in Box 1. Your reported tips will also be broken out in Box 7 and included in the total for Box 5 to show how Social Security and Medicare taxes were calculated.

Box 8, “Allocated tips,” may contain an amount if you work for a large food or beverage establishment. This occurs if total reported tips are less than 8% of the establishment’s gross sales. The employer is then required to allocate the difference between reported tips and the 8% sales figure among the tipped employees.

The amount in Box 8 represents income on which no taxes have been withheld, which the IRS presumes you received but did not report. If your daily tip log shows your actual earnings were less than the allocated amount, you can use your records to report the correct figure. Without such proof, you must report the Box 8 amount as additional income.

Reporting Tips on Your Federal Tax Return

When preparing your federal income tax return, you report the income from your W-2. The figure from Box 1, which includes wages and reported tips, is transferred to the wages line on your Form 1040. This step accounts for income on which your employer has already withheld taxes.

You must also report any tip income not included on your W-2. This includes tips that totaled less than $20 in a month and any allocated tips from Box 8 that you must claim. To do this, you will complete Form 4137, Social Security and Medicare Tax on Unreported Tip Income. The total unreported tip income from Form 4137 is added to the wages on your Form 1040, and the calculated tax is added to your total tax liability.