Table of Contents
This chapter is for employees who receive tips.
All tips you receive are income and are subject to federal income tax. You must include in gross income all tips you receive directly, charged tips paid to you by your employer, and your share of any tips you receive under a tip-splitting or tip-pooling arrangement.
The value of noncash tips, such as tickets, passes, or other items of value are also income and subject to tax.
Reporting your tip income correctly is not difficult. You must do three things.
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Keep a daily tip record.
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Report tips to your employer.
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Report all your tips on your income tax return.
This chapter will explain these three things and show you what to do on your tax return if you have not done the first two.
This chapter will also show you how to treat allocated tips.
Publication
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531 Reporting Tip Income
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1244 Employee's Daily Record of Tips and Report to Employer
Form (and Instructions)
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4137 Social Security and Medicare Tax on Unreported Tip Income
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4070 Employee's Report of Tips to Employer
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Report your tips accurately to your employer,
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Report your tips accurately on your tax return, and
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Prove your tip income if your return is ever questioned.
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Write information about your tips in a tip diary, or
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Keep copies of documents that show your tips, such as restaurant bills and credit card charge slips.
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Cash tips you get directly from customers or from other employees.
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Tips from credit card charge customers that your employer pays you. (Also include tips from debit card charge customers.)
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The value of any noncash tips you get, such as tickets, passes, or other items of value.
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The amount of tips you paid out to other employees through tip pools or tip splitting, or other arrangements, and the names of the employees to whom you paid the tips.
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Your employer can withhold federal income tax and social security and Medicare taxes or railroad retirement tax,
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Your employer can report the correct amount of your earnings to the Social Security Administration or Railroad Retirement Board (which affects your benefits when you retire or if you become disabled, or your family's benefits if you die), and
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You can avoid the penalty for not reporting tips to your employer (explained later).
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Your name, address, and social security number.
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Your employer's name, address, and business name (if it is different from your employer's name).
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The month (or the dates of any shorter period) in which you received tips.
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The total tips required to be reported for that period.
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All taxes on your regular pay.
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Social security and Medicare taxes or railroad retirement tax on your reported tips.
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Federal, state, and local income taxes on your reported tips.
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Your employer may participate in the Tip Rate Determination and Education Program. The program was developed to help employees and employers understand and meet their tip reporting responsibilities.
There are two agreements under the program: the Tip Rate Determination Agreement (TRDA) and the Tip Reporting Alternative
Commitment (TRAC). In addition, employers in the food and beverage industry may be able to get approval of an employer-designed
EmTRAC program. For information on the EmTRAC program, see Notice 2001-1, which is on page 261 of Internal Revenue Bulletin
2001-2 at
www.irs.gov/pub/irs-irbs/irb01-02.pdf.
If you are employed in the gaming industry, your employer may have a Gaming Industry Tip Compliance Agreement Program. See
Revenue Procedure 2007-32, which is on page 1322 of Internal Revenue Bulletin No. 2007-22 at
www.irs.gov/pub/irs-irbs/irb07-22.pdf.
If you are employed in the food and beverage industry, your employer may participate in an Attributed Tip Income Program (ATIP). See Revenue Procedure 2006-30, which is on page 110 of Internal Revenue Bulletin No. 2006-31 at www.irs.gov/pub/irs-irbs/irb06-31.pdf.
Your employer can provide you with a copy of any applicable agreement. To find out more about these agreements, visit www.irs.gov and type “restaurant tip reporting” in the Keyword search box. You may also call 1-800-829-4933 or visit www.irs.gov/localcontacts for the IRS Taxpayer Assistance Center in your area; or send an email to TIP.Program@irs.gov and request information on this program.
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Cash and charge tips you received that totaled less than $20 for any month.
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The value of noncash tips, such as tickets, passes, or other items of value.
Example.
John Allen began working at the Diamond Restaurant (his only employer in 2007) on June 30 and received $10,000 in wages during the year. John kept a daily tip record showing that his tips for June were $18 and his tips for the rest of the year totaled $7,000. He was not required to report his June tips to his employer, but he reported all of the rest of his tips to his employer as required.
John's Form W-2 from Diamond Restaurant shows $17,000 ($10,000 wages plus $7,000 reported tips) in box 1. He adds the $18 unreported tips to that amount and reports $17,018 as wages on his tax return.
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If your employer allocated tips to you, they are shown separately in box 8 of your Form W-2. They are not included in box 1 with your wages and reported tips. If box 8 is blank, this discussion does not apply to you.
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You worked in a restaurant, cocktail lounge, or similar business that must allocate tips to employees,
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The tips you reported to your employer were less than your share of 8% of food and drink sales, and
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You did not participate in your employer's Attributed Tip Income Program (ATIP).
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You kept a daily tip record, or other evidence that is as credible and as reliable as a daily tip record, as required under rules explained earlier.
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Your tip record is incomplete, but it shows that your actual tips were more than the tips you reported to your employer plus the allocated tips.
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