If you work in an industry where you receive tip income, such as the food service industry, you should know that there are income tax implications related to that income. This article provides an overview of reporting tip income for income tax purposes.
Requirements for Employees
Employees are required to report to their employers all tip income they receive using Form 4070 Employee’s Report of Tips to Employer or a similar form.Employees must report all tip income whether customers paid that tip income directly to the employees, customers initially paid tip income to the employer by using a credit or debit card, or employees received tip income from other employees as a part of tip-outs.
Employees must track the amount of tips they receive daily for the entire tax year using Form 4070A Employee’s Daily Record of Tips. It is important for employees to maintain records of tip income received in the even their tax preparer or the Internal Revenue Service (IRS) has questions about the employee’s tip income.
Form 4070 is due to the employer by the 10th day of the month following the month in which the employee received the tip income. The reporting must include the following information at a minimum:
- The employee’s name, address, and Social Security Number;
- The employer’s name and address;
- The period covered by the reporting;
- The total amount of tip income received; and
- The employee’s signature.
Employees are excused from reporting tip income for a given month only when the total amount of tips received for that month are less than $20.
In the event an employee fails to report all of his tip income to the IRS, the IRS will make the employee pay the following amounts:
- The missing amount of income tax, social security tax, and Medicare tax owed;
- A penalty of 50% of the social security and Medicare taxes owed;
- A penalty of 20% of the income tax owed; and
- Interest on all unpaid amounts.
Requirements for Employers
Employers must collect required taxes on any tip income reported to them by employees. These taxes include federal income tax, social security tax, Medicare tax, and state income tax where applicable. Typically, employers collect these taxes from employees by deducting the monies from the employee’s pay.
In addition, employers must ensure that the total amount of tip income reported to them during a pay period is equal to or greater than 8% of the employer’s total receipts. When the total tip income reported to employers is less than 8% of the employer’s total receipts, the employer must allocate the difference between the actual tip income and 8% of the employer’s total gross receipts.
Employers can allocate tip income using one of three methods:
- Good Faith Agreement
- Gross Receipt Method
- Hours Worked Method
Alternatively, employers can submit an application to the IRS requesting that they be permitted to report tip income at an amount less than 8% of the employer’s total receipts. The IRS will require tip income to be at least 2% of the employer’s total receipts.
Finally, employers in industries where their employees commonly receive tips must report tip income to the IRS using Form 8027 Employer’s Annual Information Return of Tip Income and Allocated Tips.
Who can answer additional questions about tip income and income taxes?
A tax attorney cannot only answer any additional questions you may have about tip income, but a tax attorney will have the training and experience to help you file your income taxes, both federal and state.
When you call the telephone number located at the top of this web site or complete the form below, a tax attorney will contact you to start answering your questions. The first consultation with a tax attorney is free of charge and all conversations with a tax attorney are completely confidential, so you have every reason to get help from a tax attorney starting today.
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Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.