Reporting Tips to the IRS as a Tipped Employee

By Top Tax Staff | May 11, 2016 7:30:00 AM | Tax Tips and Help

    

People who work as tipped employees must report both their regular income and their tips from each shift as income. If you work as a waiter or waitress, a casino poker dealer, a valet, bus boy, or as another commonly tipped worker, it is important that you know how and when to report your tips to your employer and to the IRS.

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Definition of Tips

A tip is any voluntary payment that you receive from a customer. A tip can take the form of:

  • Cash
  • Checks
  • Credit Card charges'
  • Non-monetary gifts like a movie tickets, bus passes, or other goods)
Businesses that allow customers to tip are not allowed by law to stipulate the amount or the frequency with which customers tip. If a business does mandate tipping, this money can instead by considered a service charge by the IRS, which will not require that you report it as a tip.

When to Report Tips

If your employer requires a mandatory gratuity on guest tickets or charges extra for takeout orders, for example, it is not under any obligation to report this extra money as tips. Even if the employer distributes the service charges or gratuity among the employees, you do not have to report the money as a tip, but rather as part of your regular income.

Likewise, if your tips are less than $20 for the money, you are not obligated to report the money to your employer. It is only when you make more than $20 that you have to report the initial $20 plus anything extra to the IRS and to the company for which you work.

If you do make more than $20 in tips, you are required to fill out the IRS Form 4070 and submit it to your boss. This form must be completed and submitted by the 10th of each month. It allows your employer to withhold money for:

  • Medicare
  • FICA
  • Social Security
  • State taxes

How to Report Tips

Your employer should have the IRS Form 4070 on hand for you to fill out by the 10th of each month. If not, you must put in writing these details so that you can be credited with legally and accurately reporting your tips:

  • Your full legal name
  • Your legal address
  • The amount of your month's tips
  • Your employer's name and address
  • Your Social Security Number
  • The month for when the tips were collected
  • Your signature
  • The date that the form was submitted

After you write out these details, you should then give it to your employer or your human resource manager.

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Why to Report Your Tips Each Month

Tipped employees like waitresses and valets can end each shift with a handful of cash. It may be very tempting to under-report your tips because you want to keep as many of them as you can without having to pay your employer the fair share.

However, it is crucial that you report the full amount accurately and truthfully. If you fail to report the full amount, you could face serious consequences that could include having your future earnings levied to pay off the amount that you owe the IRS. Likewise, the IRS could seize up to half of your Social Security and still require that you pay the delinquent amount in full.

The amount of money that you report also plays into how much Social Security you and your loved ones can legally receive once retire or if you become injured or die. Reporting the full amount that you make each months allows you to collect more of your Social Security benefits when you become eligible for them.

Tipped employees must report their tips and earnings to the IRS. You can comply by knowing what monies to report and how and when to do so.

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