Publication 1872 (8-2006) TIPS ON TIPS: A GUIDE TO TIP INCOME REPORTING FOR EMPLOYEES IN THE FOOD AND BEVERAGE INDUSTRY

If you wait tables, bus tables, park cars, bartend, serve cocktails, deliver food, or entertain, this guide is for you.

As an employee of a food and beverage establishment, the tip income you receive — whether cash or included in a charge — is taxable income. As income, these tips are subject to federal income tax, social security and Medicare taxes, and may be subject to state income tax as well.

The Internal Revenue Service (IRS) has prepared this guide to aid the employee who may need answers to tip income-reporting questions.

What tips do I have to report?

Do I have to report all my tips to my boss?

If you received $20.00 or more in tips in any one month, you should report all your tips to your employer so that federal income tax, social security and Medicare taxes, and maybe state income tax can be withheld.

Do I have to report all my tips on my tax return?

Yes. All tips are income and should be reported on your tax return.

I was told that I had to report only eight percent (8%) of my total sales as tips. Is this true?

No. You must report to your employer all (100%) tips you receive, except for the tips from any month that do not total at least $20.00. The 8% allocation rule is a requirement placed on the employer.

Here’s how the 8% rule works:

The employer has to determine if the employees have reported tips in the aggregate of at least 8% of the establishment’s gross sales subject to tipping. To put it another way, the employer adds all the establishment’s gross receipts (sales where tipping is involved). Then the employer figures 8% of that number. If all the employees’ reported-tips total less than that 8% figure, the employer figures out the difference between what the employees reported and the 8% amount. The employer then allocates that difference among all tipped employees. If an employee reported less than the allocated amount to the employer, that allocated amount will appear on the individual’s Form W-2, Wage and Tax Statement, in the box titled Allocated Tips.

Sometimes I don’t get tips directly from customers, but rather from another employee. Do I need to report those tips?

Yes. Employees who receive tips from another employee are required to report “tip-outs.” Employees often disburse tips out of their earned tips to another employee (tip-outs). Remember, all tips are taxable income.

Do I have to report tip-outs that I pay to other employees?

No. You report to your employer only the amount of tips you retain. However, you must maintain records of tip-outs with your other tip income (cash tips, charged tips, split tips, tip pool).

What records do I need to keep?

What type of records do I have to keep?

You must keep a running daily log of all your tip income. You can use Publication 1244, Employee’s Daily Record of Tips and Report to Employer, to record your tip income for one year. Publication 1244 includes Form 4070, Employee’s Report of Tips to Employer, and Form 4070A, Employee’s Daily Record of Tips. These forms have spacing for you to log your name, the employer’s name and address, date tips were received, date of entry, tips received, tips paid out, and name of employee paid. For a free copy of Publication 1244, call the IRS at 1-800-829-3676. Your daily log would be your best proof should your income tax return be questioned.

What can happen if I do not keep a record of my tips?

If it is determined in an examination that you underreported your tip income, the IRS will assess the taxes you owe based on the best available records of your employer. Tip income adds up. Underreporting could result in your owing substantial taxes, penalties, and interest.

If I report all my tips to my employer, do I still have to keep records?

Yes. You should keep a daily log of your tips so that in case of an examination, you can substantiate the actual amount of tips received. There are a number of reasons why you might need records:

I forgot to report my tip income to my employer, but I remembered to report it on my federal income tax return. Will that present a problem?

If you do not report your tip income to your employer, but you do report the tip income on your federal income tax return, you may owe a 50% social security and Medicare tax penalty and be subject to a negligence penalty and possibly an estimated tax penalty. When you don’t report your tips to your employer, it places your employer at risk of possible assessment of the employer’s share of social security and Medicare taxes.

If I report all my tips but my taxes on the tips are greater than my pay from my employer, how do I pay the remaining taxes?

You can either pay the tax when you file your federal income tax return or you can reach into your tip money and give some to your employer to be applied to those under-withheld taxes. The employer will then record these taxes and you will get credit on your Form W-2. If you wait to pay when you file your tax return, you may be subject to an estimated tax penalty.

What can happen if I don’t report my tips to the IRS?

If the IRS determines through an examination that you underreported your tips, you could be subject to additional federal income tax, social security and Medicare taxes, and maybe state income tax. Also, a penalty of 50% of the additional social security and Medicare taxes, and a negligence penalty of 20% of the additional income tax, plus interest, may apply.

What’s in it for me if I report all my tip income?

There are many good reasons why you want to report all your tip income:

My employer has entered into a compliance agreement with the IRS concerning tips. What is this?

The national Tip Rate Determination/ Education Program was developed in 1993 to help those employees receiving tip income and their employers understand the laws on reporting tip income. Under this program, the employer can enter into one of two arrangements — the Tip Rate Determination Agreement (TRDA) or the Tip Reporting Alternative Commitment (TRAC) (created in June 1995). You can ask your employer for more information about this program.

TRDA

What is my responsibility, as an employee, under the Tip Rate Determination Agreement?

You are required to file your federal tax returns. You must sign a Tipped Employee Participation Agreement proclaiming that you are participating in the program. The employer, as a participant in the TRDA, has agreed with the IRS to a tip rate for the employer’s establishment. To stay a participating employee, you must report tips at or above the tip rate determined by the agreement. Further, as part of the TRDA arrangement, the employer is required to report your name, social security number, the hours worked or sales made, your job classification, and your reported tips to the IRS if you do not report tips at or above the determined tip rate.

TRAC

What is my responsibility, as an employee, under the Tip Reporting Alternative Commitment?

Directly-tipped employee:

Does tip income reporting apply only to employees in the food and beverage industry?

No. Anyone who receives tip income is required by law to report it to his or her employer. The Tip Rate Determination/ Education Program (TRD/EP) was first promoted in the gaming industry (casino industry) in Las Vegas, Nevada, and subsequently spread to the food and beverage industry. Other individuals that receive tip income include airport skycaps, bartenders, hair stylists, bellhops, casino workers, delivery service people, hotel housekeepers, manicurists, masseuses, parking attendants, railroad redcaps, and taxi drivers.

Why should I report my tips to my employer?

When you report your tip income to your employer, the employer is required to withhold federal income taxes, social security and Medicare taxes, and maybe state income tax. Tip reporting may increase your social security credits resulting in greater social security and Medicare benefits when you retire. Tip reporting may also increase other benefits to which you may become entitled, such as unemployment benefits, worker’s compensation, or retirement benefits. Additionally, a greater income may improve financing approval for mortgage, car, and other loans.

Why has tip reporting become such an issue?

To report all tip income has always been the law. The IRS has put greater emphasis on reporting tip income over the past few years because a significant number of taxpayers are not reporting all tip earnings as income.

How can I get more information?

The IRS provides the following publications and forms relating to tip income reporting. These materials can be downloaded from the IRS Web site at http://www.irs.ustreas.gov and ordered through the IRS by dialing 1-800-829-3676. (For TTY/TDD equipment access, dial 1-800-829-4059.)

Pub 505 – Tax Withholding and Estimated Tax

Pub 531 – Reporting Tip Income

Pub 1244 – Employee’s Daily Record of Tips and Report to Employers. This publication includes Form 4070, Employee’s Report of Tips to Employer, and Form 4070A, Employee’s Daily Record of Tips.

Form 1040ES – Estimated Tax for Individuals

Form 4137 – Social Security and Medicare Tax on Unreported Tip Income