26.6 When Tips Are Subject to Withholding

Tips are subject to income tax and FICA (Social Security and Medicare) withholdings. If you receive cash tips amounting to $20 or more in a month, you must report the total amount of tips received during the month to your employer on Form 4070 (or a similar written report). Include cash tips paid to you in your own behalf. If you “split” or share tips with others, you include in your report only your share. You do not include tips received in the form of merchandise or your share of service charges turned over to you by your employer. Make the report on or before the 10th day after the end of the month in which the tips are received. (If the 10th day is a Saturday, Sunday, or legal holiday, you must submit the report by the next business day.) For example, tips amounting to $20 or more that are received during January 2013 are reported by February 11, 2013 (February 10 is a Sunday). Your employer may require more frequent reporting.

Filing Instruction

Tip Reporting

If you have not reported tips of $20 or more in any month, or tips are allocated to you under the special tip allocation rules, you must compute Social Security and Medicare tax on that amount on Form 4137 and enter it as a tax due on Line 57 of Form 1040; attach Form 4137 to Form 1040. The unreported tips must be included as wages on Line 7 of Form 1040.

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You are considered to have income from tips when you receive the tips, even if they are not reported to the employer.

Your employer withholds the Social Security, Medicare, and income tax due on the tips from your wages or from funds you give him or her for withholding purposes. If the taxes due cannot be collected on the tips, either from your wages or from voluntary contributions, by the 10th day after the end of the month in which tips are reported, you have to pay the tax when you file your income tax return.

Penalty for failure to report tips.

Failure to report tip income of $20 or more received during the month to your employer may subject you to a penalty of 50% of the Social Security and Medicare tax due on the unreported tips, unless your failure was due to reasonable cause rather than to willful neglect.

Tips of less than $20 per month are taxable but not subject to withholding.

Tip allocation reporting by large restaurants.

To help the IRS audit the reporting of tip income, restaurants employing at least 10 people must make a special report of income and allocate tips based on gross receipts. For purposes of the allocation, the law assumes tip income of at least 8%. If you voluntarily report tips equal to your allocable share of 8% of the restaurant’s gross receipts, no allocation will be made to you. However, if the total tips reported by all employees is less than 8% of gross receipts and you do not report your share of the 8%, your employer must make an allocation based on the difference between the amount you reported and your share of the 8% amount. The allocated amount is shown on Form W-2. However, taxes are not withheld on the allocated amount. Taxes are withheld only on amounts actually reported by employees. An employer or majority of employees may ask the IRS to apply a tip percentage of less than 8%, but no lower than 2%.

Reporting allocated tips.

Your employer will show allocated tips in Box 8 of your Form W-2. However, this amount will not be included in Box 1 wages and you must add it to income yourself by reporting it on Line 7 of Form 1040. You also must compute Social Security and Medicare tax on the allocated tips on Form 4137 and enter the tax from Form 4137 on Line 57 of Form 1040. You may not use Form 1040A or Form 1040EZ.

Filing Instruction

Uncollected Social Security and Medicare Taxes on Tips

If your employer is unable to collect enough money from your wages during the year to cover the Social Security or Medicare tax on the tips you reported, the uncollected amount is shown on your Form W-2 in Box 12 with Code A next to it for Social Security or Code B for Medicare. You must report the uncollected amount on Line 60 of Form 1040 as an additional tax due; enter code “UT”.

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