Waitresses and waiters typically make most of their money from tips. Like the wages a restaurant pays its serving staff, your tips are also taxable. However, the majority of tips are often paid in cash directly to you when you wait tables in a restaurant. Because of this, you are required to adhere to special reporting and tax filing rules in order to ensure that you comply with IRS regulations.
You can use IRS Form 4070 to report cash tips you earn while waiting tables. Although it may be tempting not to disclose these tips to the IRS, failure to adequately report this income could result in serious fines or penalties.
Tips and Taxes for Servers
Tips may be paid in the form of cash, add-ons to credit card purchases or from fellow workers in a tip-sharing system. Tips don’t include service charges like large party fees collected on your behalf by the restaurant. Service fees count as wages. The IRS says to report all tips to your employer in any month you get $20 or more using IRS Form 4070 or an equivalent reporting method. Any tips you don’t report to your employer have to be added to other income reported on your annual tax return.
Understanding The Tip Credit
Restaurant employers only have to pay servers $2.13 per hour, as of the time of publication, compared to the federal minimum wage of $7.25. The difference is called a “tip credit.” If you don’t make enough tips to bring your hourly wage up to minimum wage, your employer has to make up the difference. Your paycheck might not be enough to cover payroll taxes, as the amount employers pay is usually a small part of earnings. The IRS says payroll taxes not withheld from one paycheck must be deducted from the next. However, any payroll taxes that are not collected for a month by the 10th of the following month don’t have to be withheld from your pay. Uncollected taxes are listed in box 12 on your year-end W-2 statement, and you’ll have to pay them when you file your taxes.
Issues With Unreported Tips
When a waitress earns tips and doesn’t report them to her employer, she is responsible for claiming them on her tax return and adding them to her other income when calculating federal income tax. Uncollected Social Security and Medicare taxes are computed using IRS Form 4137. The amounts from the 4137 form are entered on the tax return and added to the total of taxes due.
Rules Concerning Tips and Taxes
IRS rules require restaurants to report tips for waitresses and waiters amounting to at least 8 percent of gross sales. When a waitress reports tips that total less than 8 percent of her sales, the employer must “allocate” the difference. The shortfall is listed in box 8 on her W-2 form. Employers don’t take any taxes out on allocated tips. The waitress must report the allocated tips on her tax return and pay the taxes or show that she didn’t make the allocated tip amount.
- IRS: Topic 761 -– Tips -– Withholding and Reporting
- U.S. Department of Labor: Factsheet #15 -- Tipped Employees Under the Fair Labor Standards Act
- IRS: Publication 531 -- Reporting Tip Income
- United States Department of Labor: Tips
- IRS: Reporting Tip Income - Restaurant Tax Tips
- Northshore School District. "2018 Notice to Employee." Accessed Sept. 2, 2020.
- Social Security Administration. "Special Rules for Cash Tips After 1965." Accessed Sept. 1, 2020.
- IRS. "Tip Recordkeeping & Reporting." Accessed Sept. 1, 2020.
- IRS. "Frequently Asked Questions/Tips." Accessed Sept. 1, 2020.
- Social Security Administration. "Contribution And Benefit Base." Accessed Sept. 3, 2020.
- IRS. "Form 4137 Social Security and Medicare Tax on Unreported Tip Income 2019." Page 2. Accessed Sept. 1, 2020.
Based in Atlanta, Georgia, W D Adkins has been writing professionally since 2008. He writes about business, personal finance and careers. Adkins holds master's degrees in history and sociology from Georgia State University. He became a member of the Society of Professional Journalists in 2009.