Workers in service industries sometimes receive gratuity from customers and clients in addition to normal wages paid by an employer. The tips you receive are subject to federal income tax, Social Security tax and Medicare tax, just like wages. If you receive tips, you are generally required to keep a record and report them to your employer so that you can claim them on your income tax return.
Tip Income Basics
When you receive more than $20 in tips during a calendar month, you have to report your tip income to your employer by the 10th of the next month. Tips include cash received directly from customers or other employees and gratuities that customers charge to their bills. Service charges and other fixed amounts that employers add to a bill are considered wages rather than tips. For example, if a restaurant charges an automatic gratuity of 18 percent for parties of six or more, that amount is not considered a tip.
The Internal Revenue Service requires that you keep tip records to report to your employer and to prove your tip income if it is ever questioned. IRS Form 4070A is a daily tip record you can use to keep track of tips received. If you don't keep a tip diary, you can keep a daily tip record by keeping copies of documents that show your tips, like bills and credit card charge slips.
Reporting Tips to Employers
You must report your tip income to your employer each month if you make more than $20 in tips so that your employer can withhold money from your pay for federal income tax, Social Security and Medicare. If your employer does not have his own system for reporting tips, you can fill out Form 4070, sign and date the form and give it to your employer to report tip income.
You must report tip income on your federal income tax return. Where you report tip income depends on the tax form you use to file your federal return. According to the IRS, tip income is reported with wages on line 7 of Form 1040 or Form 1040A, line 1 of Form 1040EZ, line 8 of Form 1040NR or line 3 of Form 1040NR-EZ. The tip income you report to your employer is included in the wages shown in box 1 of the W-2 form you receive from your employer. Any tips you did not report to your employer must be added to the amount shown in box 1 of your W-2 when reporting wages and tip income on your tax return.
- Internal Revenue Service: Topic 761 -- Tips -– Withholding and Reporting
- Internal Revenue Service: Publication 531 -- Introductory Material
- Internal Revenue Service: Publication 531 -- Main Content
- Internal Revenue Service: Employment Tax on Tip Income
- 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.
Gregory Hamel has been a writer since September 2008 and has also authored three novels. He has a Bachelor of Arts in economics from St. Olaf College. Hamel maintains a blog focused on massive open online courses and computer programming.