How to Claim Tips as a Server on Taxes

Working as a server comes with unique financial responsibilities, particularly concerning tip income. Unlike standard wages, tips require a specific tracking and reporting process to ensure compliance with federal tax laws. Properly managing this income is part of a server’s duties, as all tips are considered taxable. Understanding the specific rules set by the Internal Revenue Service (IRS) allows servers to accurately report their earnings, pay the correct amount of tax, and avoid potential penalties.

Understanding Your Tip Reporting Obligations

All tips received by a server are considered taxable income by the IRS and must be reported. This includes gratuities in any form, such as direct cash from customers, electronic tips left on credit or debit card transactions, and tips received through a tip-sharing arrangement. Even non-cash tips, like tickets to an event, count as income and must be valued at their fair market price.

It is important to distinguish tips from service charges. A service charge is a mandatory fee added to a bill by the establishment and treated as regular wages, not as tips. The responsibility to report income applies to all tips an employee receives, such as when a busser receives a portion of a server’s tips through a “tip-out.”

Tracking and Reporting Tips to Your Employer

A server’s reporting duties begin with daily record-keeping. The IRS provides Publication 1244, which contains Form 4070A, Employee’s Daily Record of Tips, as a tool to help employees log all gratuities received. This daily log should document cash tips, credit and debit card tips, and any tips paid out to other staff members through a tip-sharing arrangement. This record serves as proof of income if questions arise later.

Using the information from the daily log, a server must prepare a monthly report for their employer, often using Form 4070 or an employer’s system. This report is required for any month in which a server receives $20 or more in tips and must be submitted by the 10th day of the month following the month the tips were earned. If the 10th falls on a weekend or legal holiday, the deadline is extended to the next business day.

The report must include the employee’s name, address, and Social Security number, the employer’s name and address, the month covered, and the total amount of tips received. Submitting this report allows the employer to withhold the necessary federal income, Social Security, and Medicare taxes. Failure to report tips to an employer can result in a penalty equal to 50% of the Social Security and Medicare tax that would have been due on the unreported tips.

Reporting Tips on Your Annual Tax Return

At the end of the year, the tips a server reported to their employer are included on their Form W-2, Wage and Tax Statement. This income will be reflected in Box 1 for total wages, Box 5 for Medicare wages and tips, and Box 7 for Social Security tips. This information is transferred directly from the W-2 to Form 1040 when filing an annual tax return.

There are instances where a server may have received tips that were not reported to their employer, such as if they earned less than $20 in tips in a particular month. These amounts must still be reported on the tax return. To do so, they must file Form 4137, Social Security and Medicare Tax on Unreported Tip Income, along with their Form 1040. This form calculates the taxes owed on the unreported tips, which is then added to their total tax liability.

Handling Allocated Tips

Servers at large food and beverage establishments may find an amount reported in Box 8 of their W-2, labeled “Allocated Tips.” This occurs when the total tips reported by all employees at the establishment are less than 8% of the location’s gross receipts for the year. The employer is then required to “allocate” the difference among the tipped employees. This allocation is an estimate of unreported tips and is not included in the income totals found in Boxes 1, 5, or 7 of the W-2.

Because allocated tips have not had taxes withheld, the server is responsible for paying their share of taxes on this amount. The allocated tip amount shown in Box 8 must be reported as additional income on the server’s Form 1040. The server must also file Form 4137 to calculate and pay the Social Security and Medicare taxes due on these allocated tips.

A server is not automatically required to accept the allocated amount as correct. If a server has maintained a detailed daily tip log, such as Form 4070A, they can use these records as evidence of their actual income. If their records prove they received fewer tips than the allocated amount, they can report the lower, correct amount on their tax return.