Taxing Tips for Restaurant Employees

Seattle possesses a wealth of delicious dining establishments with wait staff that really ensure customer satisfaction. As patrons, we reward this job well done with tips. Tips require special treatment when reporting for tax purposes. Both the employee and the employer of a tipping establishment have their own responsibilities for the accurate reporting of tips. This post covers employee responsibilities.

Tips Defined

Tips are discretionary (optional or extra) payments customers give to employees, typically for satisfactory or above satisfactory service. In addition to cash and charged amounts, items of value like tickets are also considered tips. The IRS considers all cash and non-cash tips as employee income that is subject to Federal income taxes, which includes Social Security and Medicare taxes.

Employee Responsibilities

As an employee, your first step is maintaining an accurate record of the tips you’ve received. The simplest way of recording daily cash and charge tips is to use IRS Form 4070A, Employee’s Daily Record of Tips. Non-cash tips, such as tickets or special passes, are not reported to your employer, but you still should keep a record of these, as they must be reported on your tax return.

The next step is to report your tips to your employer with a written statement. You should include all cash tips you received, unless your tips didn’t total $20 for a given month. According to the IRS, cash tips include tips received from customers, charged tips (e.g., credit and debit card charges) that are distributed to you by your employer, and tips received from other employees under any tip-sharing arrangement. Your statement must simply include your information (name, address, and social security number), your employer’s information (employer’s or establishment’s name and address), the period your report covers, and the total amount of tips you received during that period. While there is no required form, you may use Form 4070, Employee’s Report of Tips to Employer, unless your employer provides an alternate form or utilizes an electronic filing system to report your tips.

Your last step is reporting your tips on your tax return. Use Form 4137, Social Security and Medicare Tax on Unreported Tip Income for tips that are not allocated to you by your employer, or that total less than $20 per month. This form reports the unreported tip income amount as additional wages on your Form 1040 and ensures that you pay your employee share Social Security and Medicare taxes on those tips.

There is an exception to tip reporting. As an employee, you do not include service charges in your tip record. Service charges, like mandatory gratuities for large parties, are added to a customer’s bill and are distributed to you later by your employer. No special action is required on your part, as this is a non-tip wage and reported income.

In our next blog post, we will go over the employer’s responsibilities regarding taxes on tips.

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Written by Robert V. Boeshaar

Robert V. Boeshaar

Robert V. Boeshaar is a Seattle tax attorney committed to helping individuals and small businesses who are facing problems with the IRS. He believes in using his experience to serve others and to make a difference in their lives.