tips for employers and employees about reporting tips.
updated February 2002
need to know if you earn tips ...
1. 100% is the magic number: All tips are taxable.
If you earn tips, be aware that if you receive more than $20 in a month in
tips, ALL these tips count as income that you must report and pay taxes
on. That includes your cash tips, your charge-card tips, and any tips you
get from other employees, minus what you tip out to others.
You may have heard all you need to do is report tips equal to 8% of sales,
or 10%, or just your charge-card tips. That's a big misconception, and
could get you in legal trouble if you earn more. The law requires you to
report and pay taxes on 100% of the tips you keep after tip-outs. See more
on the "8% myth", below.
2. Employees must record their tips daily.
If you get audited, there's only one thing that'll save you: good daily
records. The IRS requires tipped employees to keep a daily tip diary or
other evidence to prove tip earnings. Your daily records must show how
much you made in cash tips and charge-card tips; the amount of tips you
received from other employees through tip pools or other tip-sharing
arrangements; and the amount tipped out to other employees.
While you're not required to use the IRS's forms to keep track of your
tips, the IRS offers Form 4070A, Employee's Daily Record of Tips,
that you can use as your personal tip diary. Call the IRS at (800)
3. Employees must report their tips to their employer.
Anyone who receives $20 or more in tips in a month must report all tips to
their employer by no later than the 10th day of the following month.
(Employers may require employees to report tips more often, like every
week or at the end of every shift.)
This requirement applies both to directly-tipped employees, such as
servers who get tips directly from customers, as well as to
indirectly-tipped employees, such as busers, who may share in these tips.
An employee's written tip report must include certain information: Check
out IRS Form 4070, Employee's Report of Tips to Employer, for
4. Not reporting your tips is a big deal.
If the IRS audits you and finds out you didn't report all your tips, you
could be facing some big bills. Falsifying tip income is illegal. You'll
owe income and FICA (Social Security and Medicare) taxes on the unreported
tips. You'll probably be stuck with interest and penalties. What's more,
the IRS has the right to audit at least as far back as three years -- or
further, if the agency believes it's a case of fraud. Some restaurant
servers have even been jailed for tax evasion.
What you need to know if you employ tipped workers ...
1. You are required to gather employees' tip reports.
The IRS requires any employee who receives more than $20 per month in tips
to report those tips to his or her employer at least once a month. Tip
reports are due to employers by no later than the 10th of the month for
the previous month's tips. Employers can require reports even more
frequently, such as at the end of every shift, every day, or every week.
The IRS requires specific information in employee tip reports. IRS
Publication 1244, Employee's Daily Record of Tips and Report to
Employer contains a form employees can use. Download the publication
in English (PDF) or
from the IRS Web site.
2. You must report your employees' tips to the IRS and withhold taxes.
Employers are required to pay the employer's share of payroll taxes on
tips, plus withhold all the required income and FICA and other payroll
taxes on wages and reported tips from wages actually paid the employee.
At the end of each year, employers are required to total each employee's
reported tips for the year and record this amount on the employee's W-2
form as "wages," along with cash wages. In some cases, employers
will also be required to "allocate" tips to certain employees on
employees' W-2 forms if they have not reported a sufficient amount of
tips; read on for more information.
3. Certain employers must file Form 8027 with the IRS -- and, in some
cases, "allocate" tips.
If your restaurant meets three criteria -- (1) tipping is customary in
your establishment, (2) you serve food and drink for on-premises
consumption, and (3) you employ more than ten employees or their
equivalent (more than 80 employee hours) on a typical day -- you must file
IRS Form 8027, Employer's Annual Information Return of Tip Income and
Allocated Tips, with the IRS each February. On this form, you report
annual totals for your restaurant's sales, charge-card sales, charge-card
tips, and reported tips.
If you are an 8027 filer and the total tips your employees report for the
pay period or the year don't add up to 8% of your restaurant's sales, you
must also go through what's called "tip allocation." This
process -- which points the IRS toward restaurants where employees may not
be reporting all their tips -- requires you to "allocate" tips
to any directly tipped employees who reported tips of less than 8% of his
or her sales. You do not withhold taxes on allocated tips. You simply show
total allocated tips on your Form 8027, and note the allocations to
specific employees on their W-2 Forms. Allocation can get complicated:
Check the Form 8027
4. A word to the wise: Employers, educate your employees!
No restaurateur wants to be in the business of policing employees' tip
reports, since it's the employees' responsibility to report and pay taxes
on their tips. However, there's good reason for employers to make sure
employees understand 100% tip reporting: Underreporting can make both you
and your employees vulnerable to an IRS audit. The law says employers owe
FICA taxes on all the tips their employees receive, whether they are
reported or not.
restaurant employers and restaurant employees may have heard the
false rumor that tip-earners only need to report tips equal to 8%
(or perhaps some other number, such as 10%) of their sales. That's
a widespread misconception. The law requires employees to report
and pay taxes on 100% of the tips they keep after tip-outs. It's
The 8% figure is simply a threshold below which many employers
must allocate tips and report certain additional information to
the IRS. The IRS can use this information to flag restaurants
where employees may be underreporting tips.
$0 Paycheck Problem
employers withhold taxes from tipped employees' paychecks,
they base the amount withheld on both the tip income and cash
wages employees receive. Sometimes tipped employees' paychecks
may not be big enough for the employer to withhold all the
required income and payroll taxes. In this "$0
paycheck" situation, here are a few tips for employers
- Employers: Be sure you are withholding all taxes in the
proper order. State and federal laws set a particular
order for withholding taxes. Check with your accountant or
payroll service to make sure you're doing it right.
- Employers: Let your employees know that you weren't able
to withhold all the required taxes. They may want to set
aside some extra money, or give you extra funds to apply
toward these taxes, so they don't get socked at tax-time
with a bigger tax bill because not enough taxes were
withheld throughout the year.
- Employers: If you're not able to withhold the full
amount of federal FICA (Social Security and Medicare)
taxes due on reported tips, you are required to note this
as "uncollected Social Security taxes on tips"
on the employee's W-2 form.
- Employees: If you're receiving $0 paychecks, be aware
that you may owe more in taxes than you expect when you
file your returns in April. Some tip-earners save a few
extra dollars over the year so they don't get caught short
at tax time. Better yet, many tipped employees give extra
money to their employers to apply to their tax
withholding. This helps avoid any estimated-tax penalties.