Your employees who receive tips of $20 or more in a calendar month while working for
you are required to report to you the total amount of tips they receive. They must
give you a written report by the tenth day following the month they received the tips.
Employees who receive tips of less than $20 in a calendar month are not required to
report their tips to you for that month.
Employees must report to you tips received directly from customers, from other employees,
and tips that customers charge to their bills. Service charges that are added to a bill and
then paid to your employees are not considered tips. These service charges are regular wages.
Employees can use Form 4070-A, Employee's Daily Record of Tips, to keep a
daily record of their tips and Form 4070, Employees' Report of Tips to Employer,
to report their tips to you. Both of these forms are in
Publication 1244,
Employee's Daily Record of Tips and Report to Employer.
When you receive the tip report from your employee, use it to figure the amount
of Social Security, Medicare, and income taxes to withhold for the pay period on both
wages and reported tips. You are responsible for paying the employer Social Security
and Medicare tax. You must collect the employee Social Security and Medicare tax and
the income tax. You can collect these taxes from the employee's wages or from other
funds the employee gives you up to the close of the calendar year. If you don't have
enough money from the employee's wages and other funds, apply them in the following order.
First withhold all taxes due on regular wages. Second withhold Social Security and Medicare
taxes due on reported tips. Finally withhold any federal, state or local income tax
on reported tips. You can withhold any remaining unpaid taxes from the employee's
next paycheck. If you cannot collect all of the employee's Social Security and Medicare
taxes on tips, show the uncollected amount in Box 13 on the employee's FormW-2, Wage and
Tax Statement. Also show the uncollected amount as an adjustment on your Form 941,
Employer's Quarterly Federal Tax Return.
When preparing your employee's Form W-2, include the tips reported to you
in Box 1, Wages, tips, and other compensation, Box 3, Medicare wages and tips,
and Box 7, Social Security tips.
When figuring your liability for federal unemployment tax, add the reported tips
to your employee's wages.
If you operate a large food or beverage establishment where tipping is customary
and you normally employ more than ten people on a typical business day, you must file
Form 8027,
Employer's Annual Information Return of Tips Income and Allocated Tips,
each calendar year. If you have more than one food or beverage operation, you must
file a separate Form 8027 for each. Form 8027 is due on the last day of February
of the next year and is filed with the Internal Revenue Service Center, Andover,
Massachusetts, 05501.
If the total tips reported by all employees are less than 8 percent of your gross
receipts (unless a lower rate has been approved by the IRS), you must allocate the
difference among the employees who received tips. The allocation may be based on each
employee's share of gross receipts or share of total hours worked, or on a written
agreement between you and your employees. Show the amount allocated in Box 8 Allocated
Tips, of the employee's Form W-2. Do not withhold income, social security or Medicare
taxes on allocated tips.
If you are required to allocate tips, your employees must continue to report all
tips to you, and you must use the amounts they report to figure payroll taxes.
For more information on employer responsibilities, see
Publication 15,
Circular E, Employer's Tax Guide. For more information on employee
responsibilities, see Publication 531,
Reporting Tip Income. Publications can be
downloaded from this site,
or ordered by calling 1-800-829-3676.
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