How do I report tips and gratuities as taxable income?

Reporting Tips as Taxable Income on Individual Tax Returns

Keeping a Daily Tip Record

1. Employees must keep a daily record of all tips received. This can be done using Form 4070A, Employee's Daily Record of Tips, which is included in Publication 1244, Employee's Daily Record of Tips and Report of Tips to Employer.

Reporting Tips to Your Employer

2. Tips must be reported to the employer if they total $20 or more per month per employer. This includes:

  - Cash tips received directly from customers.

  - Tips from customers paid through electronic settlement (e.g., credit cards, debit cards).

  - The value of noncash tips, such as tickets or other items of value.

  - Tips received from other employees through tip pools or sharing arrangements.

3. The report to the employer should include:

  - Employee's signature.

  - Employee's name, address, and social security number.

  - Employer's name and address.

  - Month or period the report covers.

  - Total tips received during the month or period.

4. Employees can use Form 4070, Employee's Report of Tips to Employer, or any other document that includes the required information.

Reporting Tips on Tax Returns

5. All tips received must be reported on the individual's income tax return. This includes both cash and noncash tips.

6. Tips that were not reported to the employer must be reported on Form 4137, Social Security and Medicare Tax on Unreported Tip Income. This form is used to report the amount of unreported tip income and the employee share of Social Security and Medicare tax owed on those tips.

7. Tips reported to the employer are included on the employee's Form W-2, Wage and Tax Statement.

Employer Obligations

8. Employers with tipped employees must:

  - Keep employee tip reports.

  - Withhold taxes based on employee wages and tip income.

  - Pay the employer share of Social Security and Medicare taxes.

Note on Service Charges

- Service charges are not considered tips and should be reported as regular wages. For more information on distinguishing tips from service charges, refer to [Tips Versus Service Charges: How to Report - Internal Revenue Service].

Employer Tax Credit

- Employers may be eligible for a tax credit for Social Security and Medicare taxes paid on certain employee tips. This is claimed using Form 8846, as detailed in [2023 Form 8846 - Internal Revenue Service].

By following these guidelines, employees and employers can ensure compliance with tax laws regarding tip income reporting.

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Sources:

Publication 531 (12/2023), Reporting Tip Income | Internal Revenue Service 2024-08-04

Tip Recordkeeping and Reporting | Internal Revenue Service 2024-08-02

Tip income is taxable and must be reported | Internal Revenue Service 2024-08-03

Topic no. 761, Tips – Withholding and reporting | Internal Revenue Service 2024-08-03

IRS introduces new service industry tip reporting program 2024-08-01

Tips Versus Service Charges: How to Report | Internal Revenue Service 2024-07-31

Publication 3148 (Rev. 12-2021), A Guide to Tip Income Reporting | Internal Revenue Service 2024-08-03

2023 Form 8846 | Internal Revenue Service 2024-08-01

Publication 3144 (Rev.11-2021), A Guide to Tip Income Reporting for Employers in Businesses Where Tip Income is Customary 2024-08-03