Reporting Taxes on Tip Income

 

If your tips each month are $20 or more, they’re taxable income. They’re also subject to Social Security and Medicare tax withholding.

If you receive $20 or more per month in cash tips, report that income to your employer. Your employer will report your tip income on your W-2, Box 7 (Social Security tips).

The law assumes an average tip rate of 8%, and it expects employees to report tips at least 8% of the gross food and drink sales. (The tip rate might be a lower agreed-upon rate.)

The reported tip income might be less than 8%. If so, restaurants and bars are required to allocate unreported tip income among their employees. This applies to places that usually employ more than 10 employees on a typical business day.

The employer reports to the IRS the difference the tips and the 8% rate allocated among the employees. Your employer will also report this unreported tip income on your W-2, Box 8 (Allocated tips).

Report allocated tips on your return unless exceptions apply. Report your actual, not allocated, tips if either of these exceptions applies:

  • You kept a daily tip record, or other evidence that’s as credible and reliable as a daily tip record.
  • Your tip record is incomplete. However, the record shows your actual tips were more than the tips you reported to your employer plus the allocated tips.

Use Form 4137 to pay Social Security and Medicare taxes on these:

  • Unallocated tips
  • Tips you didn’t tell your employer about

If you report less than your share, you should be prepared to answer questions about it.

Even if you earn less than 8% a month in tips, you should report your tip income on Form 4137. This also applies to employees who aren’t required to report tip income to their employers.

To learn more, see Publication 531: Reporting Tip Income at www.irs.gov.

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