What is a Tip for IRS Purposes?

By | November 6, 2016

Tips are optional or extra payments that employees receive from customers. Tips include cash tips received directly from customers, tips employees receive directly from customers through an electronic settlement or payment, including credit cards, debit cards, gift cards, or any other electronic payment method, and the value of any non-cash tips such as tickets or other items of value employees may get from customers.

And tip amounts received from other employees paid out through tip pools, tip outs, or tip splitting, or any other formal or informal tip sharing arrangement. Employees who receive tips must do three things: keep a daily record or tip diary, report tips to the employer, unless their tips are less than $20.00 in any given month, report all tips on their individual income tax return.


Tipped Employees and Form 4070A

Tipped employees may use Form 4070A, Employees Daily Record of Tips. That’s available in Publication 1244, the Employees Daily Record of Tips and Report to Employer. Note that many employers provide other means for their employees to report tips. For example, a system for electronic tip reporting by employees. In addition to the information on Form 4070A or other tip diary, employees need to keep a record of the date and value of any non-cash tips they get, such as tickets, passes, or other items of value. Although non-cash tips don’t need to be reported to their employer, employees must report the value of these items on their income tax return. The second requirement is for employees to report to their employer in a written statement all tips received. Tips include tips received from customers, charge tips, for example credit and debit card charges, and tips received from other employees under any tip sharing arrangement.

Form 4070, Employees Record of Tips to Employer

Form 4070, Employees Record of Tips to Employer, which is also available in Pub. 1244, is convenient and includes all the necessary information. There is no particular form that must be used. Any tip report submitted to the employer must be signed by the employee and must include the employee’s name, address, Social Security number, the employer’s name, address, and business name if different. The month or shorter period the report covers. And the total amount of tips received during the month or period. Employees must report tips to the employer by the tenth of the month after the month the tips are received. An employer may require employees to submit a statement reporting tips more than once a month. However, the statement can’t cover a period of more than one calendar month. The third obligation is to report their tips as income on their income tax returns. The tips should be entered as income on the same line as other wages. Even if at year end an employee has not reported all of their tips to the employer, they must still include these tips as income on their Form 1040.


Social Security Taxes and Tips

The employee must also calculate and report their employee share of Social Security and Medicare taxes owed on those tips on a Form 4137, Social Security and Medicare Tax On Unreported Tip Income. That form can be attached to the Form 1040. Both directly and indirectly tipped employees must report tips to the employer. A directly-tipped employee is a tipped employee who receives tips directly from customers, including an employee who, after receiving tips directly from customers, turns all the tips over to a tip pool. Examples of directly-tipped employees are waiters and waitresses, bartenders, and hairstylists. An indirectly-tipped employee is a tipped employee who does not normally receive tips directly from customers. Examples of indirectly-tipped employees are bus boys, service bartenders, cooks, and salon shampooers. Indirectly-tipped employees usually receive their tips from a directly-tipped employee. Both directly and indirectly-tipped employees must report tips to their employer. For example, a food server may tip out to bussers and bartenders. The busser or bartender must report these tips received from the food server to the employer.