This chapter is for employees
who receive tips from customers.
All tips you receive are
income and are subject to
federal income tax. You must
include in gross income all tips
you receive directly from
customers, tips from charge
customers that are paid to you
by your employer, and your share
of any tips you receive under a
tip-splitting or tip-pooling
arrangement.
The value of noncash tips,
such as tickets, passes, or
other items of value are also
income and subject to tax.
Reporting your tip income
correctly is not difficult. You
must do three things.
Keep a daily tip
record.
Report tips to your
employer.
Report all your tips
on your income tax
return.
This chapter will show you how
to do these three things and
what to do on your tax return if
you have not done the first two.
This chapter will also show you
how to treat allocated tips.
Useful Items - You
may want to see:
Publication
531
Reporting Tip Income
1244
Employee's Daily Record
of Tips and Report to
Employer
Form
(and Instructions)
4137
Social Security and
Medicare Tax on
Unreported Tip Income
4070
Employee's Report of
Tips to Employer
Keeping a Daily Tip
Record
Why keep a
daily tip record? You
must keep a daily tip record
so you can:
Report your tips
accurately to your
employer,
Report your tips
accurately on your
tax return, and
Prove your tip
income if your
return is ever
questioned.
How to keep
a daily tip record.
There are two ways to keep
a daily tip record. You can
either:
Write
information about
your tips in a tip
diary, or
Keep copies of
documents that show
your tips, such as
restaurant bills and
credit card charge
slips.
You should keep your daily
tip record with your
personal records. You must
keep your records for as
long as they are important
for administration of the
federal tax law. For
information on how long to
keep records, see
Publication 552,
Recordkeeping for
Individuals.
If you keep a tip diary,
you can use Form 4070A,
Employee's Daily Record of
Tips. To get Form 4070A, ask
the Internal Revenue Service
(IRS) or your employer for
Publication 1244.
Publication 1244 includes a
year's supply of Form 4070A.
Each day, write in the
information asked for on the
form.
If you do not use Form
4070A, start your records by
writing your name, your
employer's name, and the
name of the business if it
is different from your
employer's name. Then, each
workday, write the date and
the following information.
Cash tips you
get directly from
customers or from
other employees.
Tips from credit
card charge
customers that your
employer pays you.
The value of any
noncash tips you
get, such as
tickets, passes, or
other items of
value.
The amount of
tips you paid out to
other employees
through tip pools or
tip splitting, or
other arrangements,
and the names of the
employees to whom
you paid the tips.
Do not write in your tip
diary the amount of any service
charge that your employer adds
to a customer's bill and then
pays to you and treats as wages.
This is part of your wages, not
a tip.
Electronic tip record.
You may use an electronic
system provided by your
employer to record your
daily tips. You must receive
and keep a paper copy of
this record.
Reporting Tips to
Your Employer
Why report
tips to your employer?
You must report tips to
your employer so that:
Your employer
can withhold federal
income tax and
social security and
Medicare taxes or
railroad retirement
tax,
Your employer
can report the
correct amount of
your earnings to the
Social Security
Administration or
Railroad Retirement
Board (which affects
your benefits when
you retire or if you
become disabled, or
your family's
benefits if you
die), and
You can avoid
the penalty for not
reporting tips to
your employer
(explained later).
What tips
to report.
Report to your employer
only cash, check, debit or
credit card tips you
receive.
If your total tips for any
one month from any one job
are less than $20, do not
report the tips for that
month to that employer.
Do not report the value
of any noncash tips, such as
tickets or passes, to your
employer. You do not pay
social security and Medicare
taxes or railroad retirement
tax on these tips.
How to
report.If your employer does
not give you any other way
to report tips, you can use
Form 4070. Fill in the
information asked for on the
form, sign and date the
form, and give it to your
employer. To get a year's
supply of the form, ask the
IRS or your employer for
Publication 1244.
If you do not use Form
4070, give your employer a
statement with the following
information.
Your name,
address, and social
security number.
Your employer's
name, address, and
business name (if it
is different from
the employer's
name).
The month (or
the dates of any
shorter period) in
which you received
tips.
The total tips
required to be
reported for that
period.
You must sign and date the
statement. You should keep a
copy with your personal
records.
Your employer may require
you to report your tips more
than once a month. However,
the statement cannot cover a
period of more than one
calendar month.
Electronic tip statement.
Your employer can have you
furnish your tip statements
electronically.
When to
report. Give your
report for each month to
your employer by the 10th of
the next month. If the 10th
falls on a Saturday, Sunday,
or legal holiday, give your
employer the report by the
next day that is not a
Saturday, Sunday, or legal
holiday.
Example 1.
You must report your
tips received in May
2005 by June 10, 2005.
Example 2.
You must report your
tips received in June
2005 by July 11, 2005.
July 10th is on a
Sunday, and the 11th is
the next day that is not
a Saturday, Sunday, or
legal holiday.
Final
report. If your
employment ends during the
month, you can report your
tips when your employment
ends.
Penalty for
not reporting tips.
If you do not report tips
to your employer as
required, you may be subject
to a penalty equal to 50% of
the social security and
Medicare taxes or railroad
retirement tax you owe on
the unreported tips. (For
information about these
taxes, see
Reporting social security
and Medicare taxes on tips
not reported to your
employer under
Reporting Tips on Your Tax
Return, later.)
The penalty amount is in
addition to the taxes you
owe.
You can avoid this penalty
if you can show reasonable
cause for not reporting the
tips to your employer. To do
so, attach a statement to
your return explaining why
you did not report them.
Giving your
employer money for taxes.
Your regular pay may not
be enough for your employer
to withhold all the taxes
you owe on your regular pay
plus your reported tips. If
this happens, you can give
your employer money until
the close of the calendar
year to pay the rest of the
taxes.
If you do not give your
employer enough money, your
employer will apply your
regular pay and any money
you give to the taxes in the
following order.
All taxes on
your regular pay.
Social security
and Medicare taxes
or railroad
retirement tax on
your reported tips.
Federal, state,
and local income
taxes on your
reported tips.
Any taxes that remain
unpaid can be collected by
your employer from your next
paycheck. If withholding
taxes remain uncollected at
the end of the year, you may
be subject to a penalty for
underpayment of estimated
taxes. See Publication 505,
Tax Withholding and
Estimated Tax, for more
information.
Uncollected taxes. You must report on your
tax return any social
security and Medicare taxes
or railroad retirement tax
that remained uncollected at
the end of 2004. See
Reporting uncollected social
security and Medicare taxes
on tips under Reporting Tips
on Your Tax Return , later.
These uncollected taxes will
be shown in box 12 of your
2004 Form W-2 (codes A and
B).
Tip Rate
Determination
and Education
Program
Your employer may
participate in the Tip Rate
Determination and Education
Program. The program was
developed to help employees
and employers understand and
meet their tip reporting
responsibilities.
There are two agreements
under the program: the Tip
Rate Determination Agreement
(TRDA) and the Tip Reporting
Alternative Commitment
(TRAC). In addition,
employers in the food and
beverage industry may be
able to get approval of an
employer-designed EmTRAC
program. For information on
the EmTRAC program, see
Notice 2001-1 in Internal
Revenue Bulletin No. 2001-2
(or Cumulative Bulletin
2001-1).
If you are employed in
the gaming industry, your
employer may have a Gaming
Industry Tip Compliance
Agreement Program. See
Revenue Procedure 2003-35 in
Internal Revenue Bulletin
No. 2003-20.
Your employer can provide
you with a copy of the
agreement. If you want to
learn more about these
agreements, contact the
local IRS tip coordinator. A
list of tip coordinators is
available at
www.irs.gov.
Reporting Tips on
Your Tax Return
How to
report tips.Report your tips with
your wages on line 1, Form
1040EZ, or line 7, Form
1040A or Form 1040.
What tips
to report. You must
report all tips you received
in 2004, including both cash
tips and noncash tips, on
your tax return. Any tips
you reported to your
employer for 2004 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.
If you received $20
or more in cash and charge
tips in a month and did not
report all of those tips to
your employer, see Reporting
social security and Medicare
taxes on tips not reported
to your employer , later.
If you did not keep a
daily tip record as required
and an amount is shown in
box 8 of your Form W-2, see
Allocated Tips, later.
If you kept a daily tip
record and reported tips to
your employer as required
under the rules explained
earlier, add the following
tips to the amount in box 1
of your Form W-2.
Cash and charge
tips you received
that totaled less
than $20 for any
month.
The value of
noncash tips, such
as tickets, passes,
or other items of
value.
Example.
John Allen began
working at the Diamond
Restaurant (his only
employer in 2004) on
June 30 and received
$10,000 in wages during
the year. John kept a
daily tip record showing
that his tips for June
were $18 and his tips
for the rest of the year
totaled $7,000. He was
not required to report
his June tips to his
employer, but he
reported all of the rest
of his tips to his
employer as required.
John's Form W-2 from
Diamond Restaurant shows
$17,000 ($10,000 wages
plus $7,000 reported
tips) in box 1. He adds
the $18 unreported tips
to that amount and
reports $17,018 as wages
on his tax return.
Reporting
social security and Medicare
taxes on tips not reported
to your employer.If you received $20 or
more in cash and charge tips
in a month from any one job
and did not report all of
those tips to your employer,
you must report the social
security and Medicare taxes
on the unreported tips as
additional tax on your
return. To report these
taxes, you must file a
return even if you would not
otherwise have to file. You
must use Form 1040. (You
cannot file Form 1040EZ or
Form 1040A.)
Use Form 4137 to figure
these taxes. Enter the tax
on line 58, Form 1040, and
attach Form 4137 to your
return.
If you are subject to
the Railroad Retirement Tax
Act, you cannot use Form
4137 to pay railroad
retirement tax on unreported
tips. To get railroad
retirement credit, you must
report tips to your
employer.
Reporting
uncollected social security
and Medicare taxes on tips.
If your employer could not
collect all the social
security and Medicare taxes
or railroad retirement tax
you owe on tips reported for
2004, the uncollected taxes
will be shown in box 12 of
your Form W-2 (codes A and
B). You must report these
amounts as additional tax on
your return. You may have
uncollected taxes if your
regular pay was not enough
for your employer to
withhold all the taxes you
owe and you did not give
your employer enough money
to pay the rest of the
taxes.
To report these
uncollected taxes, you must
file a return even if you
would not otherwise have to
file. You must use Form
1040. (You cannot file Form
1040EZ or Form 1040A.)
Include the taxes in your
total tax amount on line 62,
and write “UT”
and the total of the
uncollected taxes on the
dotted line next to line 62.
Allocated Tips
If your employer allocated
tips to you, they are shown
separately in box 8 of your Form
W-2. They are not included in
box 1 with your wages and
reported tips. If box 8 is
blank, this discussion does not
apply to you.
What are
allocated tips? These
are tips that your employer
assigned to you in addition
to the tips you reported to
your employer for the year.
Your employer will have done
this only if:
You worked in a
restaurant, cocktail
lounge, or similar
business that must
allocate tips to
employees, and
The tips you
reported to your
employer were less
than your share of
8% of food and drink
sales.
How were
your allocated tips figured?
The tips allocated to you
are your share of an amount
figured by subtracting the
reported tips of all
employees from 8% (or an
approved lower rate) of food
and drink sales (other than
carryout sales and sales
with a service charge of 10%
or more). Your share of that
amount was figured using
either a method provided by
an employer-employee
agreement or a method
provided by IRS regulations
based on employees' sales or
hours worked. For
information about the exact
allocation method used, ask
your employer.
Must you
report your allocated tips
on your return?
You must report allocated
tips on your tax return
unless either of the
following exceptions
applies.
You kept a daily
tip record, or other
evidence that is as
credible and as
reliable as a daily
tip record, as
required under rules
explained earlier.
Your tip record
is incomplete, but
it shows that your
actual tips were
more than the tips
you reported to your
employer plus the
allocated tips.
If either exception applies,
report your actual tips on
your return. Do not report
the allocated tips. See
What tips to report under
Reporting Tips on Your Tax
Return, earlier.
How to
report allocated tips.
If you must report
allocated tips on your
return, add the amount in
box 8 of your Form W-2 to
the amount in box 1. Report
the total as wages on line 7
of Form 1040. (You cannot
file Form 1040EZ or Form
1040A.)
Because social security
and Medicare taxes were not
withheld from the allocated
tips, you must report those
taxes as additional tax on
your return. Complete Form
4137, and include the
allocated tips on line 1 of
the form. See
Reporting social security
and Medicare taxes on tips
not reported to your
employer under
Reporting Tips on Your Tax
Return, earlier.
