How to Keep Track of Your Tips for Tax Purposes
If you work in the service industry, there are few things better than walking out of the bar or restaurant after a great tip night. But how does that cash factor in when tax time rolls around? The Undercover Waitress, Beth Taylor, has you covered with these tax tips for tips and Form 4070.
Keeping track of tips is sometimes a problem. After a night of running back and forth with plates of hot food searing into our flesh and a smile on our faces, how many of us have woken up the next morning surprised to find forgotten wads of cash in our pockets? This sloppy bookkeeping can get us into a lot of trouble.
Get a notebook
The best way for any waitress or waiter to know exactly how much money he or she is making is to write it down. Purchase a notebook specifically for this purpose. After each shift record all of the details you need. Here is an example:
- Date: January 14, 2015
- Restaurant: The Cafe
- Shift: Dinner, 4 p.m. to 11 p.m.
- Cash tips received: $100
- Credit/debit card tips received: $100
- Total tips received: $200
- Tip outs paid to others: $20
- Net tips earned: $200 – $20 = $180
The above list may seem redundant or excessive, but having these details written down becomes invaluable if you are ever audited or questioned about your pay, or if you ever need to discuss your pay with your employer.
Servers are usually required to share a portion of their tips with other front-of-house employees, such as food runners. No server is required to pay taxes on tips that he or she paid to others. In the example above, $20 represents somebody else’s income, not the server’s.
If the employer does not provide for an alternative reporting system for tip outs, Form 4070 (also in Publication 1244) should be used by the waitress to report tip out payments to other employees. If a waitress receives a W-2 showing tip income in box 7 that is different from her own records, then she should try to reconcile any discrepancy with the restaurant and request that the Form W-2 be reissued if the original was inaccurate.
Employer record keeping
Restaurant owners are required by law to withhold payroll taxes on employee tips. Like any other employee, waitresses must fill out a W-4 for their employers. The information on this form tells the employer how much tax to withhold from paychecks.
Computerized point of sale (POS) systems are designed to make record keeping easier. In the past, servers would write down their tips on a piece of paper for the employer’s records. POS systems keep track of sales and credit card tips, so servers claim all of their tips when they clock out. Some POS systems are set up so servers may designate tip outs in the computer. A POS system can be used by employers to track tips for purposes of calculating the taxpayer’s withholdings and to determine the amounts to report on the employees’ W-2 Forms.
If the restaurant does not have a POS system, then the waitresses can use the information from the notebook where they keep track of tip income to complete Form 4070 on a monthly basis, even if they have no tip outs. Waitstaff using this method should report their tips to the restaurant by the 10th day of the month after they received them.
One issue with tip income for servers is that the taxes owed on their income are withheld from their wages only. This means that a waitress who has lots of tip income but low wages may even owe the restaurant money to cover her taxes at the end of the pay period.
Of course, employers send out W-2 forms every year before tax time, and the information includes hourly pay, tip income already claimed and taxes already paid. Again, if the waitress’ records differ from the W-2 she receives, she should contact the restaurant to obtain a corrected Form W-2.
The IRS considers non-cash tips as income. If a customer hands a server two tickets to a concert valued at $25 each, it is technically $50 in non-cash tip income. Although for tax purposes the server does not need to report non-cash tips to their employer, the IRS requires that the server claim that $50 when they file their return.
The bottom line is that ALL tips are income, which can be confusing if they aren’t consistently tracked. For that reason, a moment or two of record keeping after a shift saves you headaches every April.
Editor’s Note: This article was updated on July 27, 2016.
Learn more about investment property tax with advice from the tax experts at H&R Block.
If your income is too high, you can’t contribute to a Roth IRA directly. Learn from H&R Block’s experts how you can still invest by creating a back door Roth IRA.
What is the alternative minimum tax, and are you eligible for an exemption? Learn more about AMT rates and get tax answers at H&R Block.
Learn more about the myRA retirement planning account by the U.S Treasury Department from the tax experts at H&R Block.