How Much in Cash Tips Should I Claim on My Taxes?

Navigating tax obligations can seem complex, particularly when your income includes tips. Tips are considered taxable income, just like regular wages, and must be accurately reported. Understanding how to correctly claim cash tips is an important part of financial compliance. Proper reporting ensures you meet legal obligations and helps avoid potential penalties.

Understanding What Counts as Tip Income

For tax purposes, a “tip” is a discretionary payment from a customer to an employee. This includes cash received directly from customers, electronic payments, and the value of non-cash tips (e.g., tickets). Tips also encompass amounts received through tip pools, tip splitting, or other tip-sharing arrangements. All such payments are subject to federal income taxes.

Distinguishing tips from service charges is important because they are treated differently for tax purposes. A service charge is a mandatory payment an employer requires a customer to pay, often for large dining parties or banquet events. These are not considered tips, even if labeled as a “gratuity,” because the customer does not control the amount or recipient. Amounts distributed from service charges are generally treated as regular wages by the employer and are subject to standard payroll tax withholding.

Another category is “allocated tips,” which are amounts an employer assigns to an employee in addition to the tips the employee reported. This typically occurs in large food or beverage establishments if total tips reported by all employees are less than 8% of the establishment’s gross receipts from food and drink sales. Employers report these allocated tips to the IRS, and they are considered taxable income for the employee, though not subject to employer withholding for income, Social Security, or Medicare taxes.

Methods for Tracking Tip Income

Accurate record-keeping is essential for correctly reporting tip income. Employees who receive tips should maintain a daily record of all tips received, regardless of the amount. This record should include cash tips, tips received through electronic payments, and the value of any non-cash tips.

The IRS provides Form 4070A, Employee’s Daily Record of Tips, as a convenient tool. Though not mandatory, it helps employees document their daily earnings. This includes tips received directly, tips from other employees through tip-sharing arrangements, and any amounts paid out to other employees.

Maintaining these daily records ensures that the total amount of tips reported to an employer each month, and ultimately on an annual tax return, is accurate. If precise records are unavailable, income may need to be reconstructed based on factors like shifts worked, hours, and typical earnings. Accurate records also serve as supporting documentation if questions arise regarding income.

Reporting Tips to Your Employer

Employees are legally required to report all cash tips totaling $20 or more received in a calendar month to their employer. This reporting is essential for the employer to properly withhold income tax, Social Security tax, and Medicare tax from the employee’s regular wages or other funds. Employers are also responsible for paying their share of Social Security and Medicare taxes based on these reported tips.

The deadline for reporting tips to an employer is generally the 10th day of the month following the month the tips were received. For example, tips received in August must be reported by September 10th. If the 10th falls on a Saturday, Sunday, or legal holiday, the deadline shifts to the next business day.

No specific form is mandated for this reporting, but many employees use Form 4070, Employee’s Report of Tips to Employer. This form allows employees to provide:
Their signature
Name
Address
Social Security number
Employer’s name and address
The month or period covered
The total tips received

Submitting this information ensures the employer can accurately process payroll and tax withholdings.

Reporting Tips on Your Tax Return

All tips received, whether reported to your employer or not, must be included as income on your annual federal income tax return. Tips properly reported to your employer are generally included in Box 1, Box 5, and Box 7 of your Form W-2. This ensures these amounts are accounted for in your total taxable income.

If you received cash tips of $20 or more in a month but did not report them to your employer as required, you must still include these “unreported tips” when filing your tax return. To calculate and pay the Social Security and Medicare taxes on these amounts, use Form 4137, Social Security and Medicare Tax on Unreported Tip Income. This form also applies to allocated tips shown in Box 8 of your Form W-2, since these were not subject to employer withholding for Social Security or Medicare taxes. Failing to report tips to an employer can result in a penalty equal to 50% of the Social Security and Medicare taxes due on those amounts, in addition to the taxes themselves.

In some instances, if an employer did not collect all the Social Security and Medicare taxes owed on your wages and reported tips, this uncollected amount may be indicated in Box 12 of your Form W-2. If you were an employee but were incorrectly treated as an independent contractor, resulting in uncollected Social Security and Medicare taxes, you would use Form 8919, Uncollected Social Security and Medicare Tax on Wages. This form is used to report your share of these uncollected taxes and is distinct from Form 4137, which addresses unreported tips.