1408.Special Rules for Cash Tips After 1965

1408.1When are tips counted as wages?

Tips that total more than $20 in one calendar month are considered wages.

1408.2When are tips considered received?

Tips are considered received when you report them to your employer. If you fail to report the tips to your employer, the tips are treated as received when you actually receive them.

1408.3How are tips reported?

For each month that you receive $20 or more in tips, you must give your employer a written statement of cash and charge tips by the 10th day of the month after the month that you received the tips. Use IRS Form 4070 (Employee's Report of Tips to Employer) to report tips.

1408.4Are tips of less than $20 per month reported?

No. Tips totaling less than $20 during a single calendar month while working for any one employer are not wages for FICA tax purposes. You do not need to report them to your employer.

1408.5Are taxes withheld on tips?

Your employer must withhold Social Security, Medicare, and income taxes due on the tips you report. Your employer withholds FICA taxes due on tips from the employee's wages and pays both employer and employee portions of the tax in the same manner as the tax on your regular wages.

1408.6What tax information is available for employers?

Employers should obtain IRS Circular E (Employer's Tax Guide) for information regarding employer's tax responsibilities.

1408.7When is tip income allocated in food and beverage establishments?

Tip allocation is only required when the amount of tips reported by employees of a large food or beverage establishment is less than 8% (or an approved lower rate) of the gross receipts (other than nonallocatable receipts) for the given period. For additional information on tip allocation, visit the IRS website at www.irs.gov.

1408.8How much tip income is allocated?

The amount allocated is the difference between eight percent of total sales and the amount of tips reported.

1408.9How is allocated tip income reported?

Allocated tip income is reported as follows:

  1. Employers are required to report tips allocated to employees on IRS Form W-2 (Wage and Tax Statement);

  2. The employer withholds no Social Security, Medicare, or income taxes on allocated tips from the employees;

  3. The employer is not liable for its portion of the FICA taxes on unreported tips until the IRS notifies the employer and demands payment; and

  4. As an employee, you pay the FICA tax due by completing IRS Form 4137 (Social Security and Medicare Tax on Unreported Tip Income) and filing it with IRS Form 1040 (U.S. Individual Income Tax Return).

1408.10Do allocated tips count as wages?

For Social Security purposes, allocated tips do not count as wages or income unless you report the allocated tips as additional income on IRS Form 1040.

1408.11Must employees report allocated tip income?

You must report the allocated tip income amount as additional income unless you have records to show that the allocated tip amount was not received.

1408.12How does an employee pay FICA taxes on allocated tip income?

If you include allocated tip income on Form 1040, you pay your portion of the FICA taxes by completing IRS Form 4137. The IRS reports the additional income to us to credit your earnings record.

1408.13Where can you find more information on income and employment taxes on tips?

For more information regarding income and employment taxes on tips, see IRS Publication 531 (Reporting Income from Tips). For additional information on tip reporting, visit the IRS website at www.irs.gov.

Last Revised: Nov. 16, 2010