Withholding and Reporting on Tips for Tax Return

By | February 13, 2014

How are tips received reported on a tax return?

Generally, you must report all tips you received in 2014 on your tax return, including both cash tips and noncash tips. Any tips you reported to your employer as required in 2014 are included in the wages shown in box 1 of your Form W-2. Add to the amount in box 1 only the tips you did not report to your employer.

 

Withholding and Reporting on Tips for Tax Return

Tips are taxable income just like wages and tips are included under the broad definition of income that Congress has created. The basic rule is that if you earn tips, you’re responsible for paying income, Social Security and Medicare tax on the tip money you receive. This could be considered self-employment income in certain situations.

 

Reportable Cash Tips to IRS

Employees who receive cash tips of $20 or more in a calendar month while working, are required to report to their employer the total amount of tips they receive. The employees must give written reports by the tenth of the following month. Employees who receive tips of less than $20 in a calendar month are not required to report their tips to you but must report these amounts as income on their tax returns and pay taxes, if any.

If your employer doesn’t have a process for reporting tip income, you can use Form 4070. If you fail to report your tips to your employer, the IRS can impose a penalty equal to 50 percent of the Social Security and Medicare tax you fail to pay.

 

What Tax Forms to Report Tips:

Use Form 4137, Social Security and Medicare Tax on Unreported Tip Income, to figure social security and Medicare taxes and/or Form 8959, Additional Medicare Tax, to figure Additional Medicare Tax. Enter the tax(es) on your return as instructed, and attach the completed Form 4137 and/or Form 8959 to your return.

  • IRS Form 4070
  • IRS Form 4137

 

Common examples of service charges (sometimes called “auto-gratuities”) in service industries are:

  • Large Party Charge (restaurant),
  • Bottle Service Charge (restaurant and night-club),
  • Room Service Charge (hotel and resort),
  • Contracted Luggage Assistance Charge (hotel and resort), and
  • Mandated Delivery Charge (pizza or other retail deliveries).

 

Who Must Report Tip Income?

Remember, the requirement to report tip income isn’t just for restaurant employees. There is also no threshold amount you have to reach, either for tips to be required reported on a tax return. The IRS is looking out for people who work in industry where tips are commonly received and will try to find out this information on an audit. The best advice is to use the proper forms and to report the tips you receive on your tax return. If you participate in a tip-splitting or tip-pooling arrangement, report only the tips you receive and retain. Do not report on your income tax return any portion of the tips you receive that you pass on to other employees. However, you must report tips you receive from other employees.