If you earn tips at work, you report them in two places: to your employer each month in writing, and to the IRS once a year on your tax return. Knowing how to report tip income correctly means keeping a daily log, giving your employer a signed monthly total whenever tips from that job reach $20, and using Form 4137 at filing time to catch anything your employer didn’t withhold on. Tips are taxable for federal income tax, Social Security, and Medicare purposes, the same as regular wages.1Internal Revenue Service. Tip Income Is Taxable and Must Be Reported
What Counts as a Tip
Cash left on a table, amounts written on a card receipt, your share of a tip pool, and non-cash items like tickets or gift cards are all tips. What makes something a tip is that the customer chose freely to give it, decided the amount, and wasn’t required to pay it.2Internal Revenue Service. Revenue Ruling 2012-18
Automatic gratuities on large parties, banquet fees, and bottle service charges are not tips even if your employer passes the money to you. They’re service charges, treated as regular wages, and your employer runs them through payroll with normal withholding.3Internal Revenue Service. Tips Versus Service Charges: How to Report (FS-2015-8) You don’t track or report those separately.
Non-cash tips are a special case. You don’t report them to your employer, but you do include their fair market value on your annual return.4Internal Revenue Service. Tip Recordkeeping and Reporting
Keep a Daily Tip Record
Federal tax law requires you to keep records that back up what you report.5Office of the Law Revision Counsel. 26 USC 6001 – Notice or Regulations Requiring Records, Statements, and Special Returns For tipped work, that means writing tips down every day, not guessing at the end of the month. The IRS publishes Form 4070A inside Publication 1244 as a ready-made log, but any notebook or spreadsheet works if it captures the same information.6Internal Revenue Service. Publication 1244 – Employee’s Daily Record of Tips and Report to Employer
Each day, note:
- The date.
- Cash tips from customers.
- Tips added to credit and debit card receipts.
- Your share of any tip pool or tip-out from coworkers.
- Amounts you paid out to other employees, which you subtract from your total.
- Any non-cash tips, with the date received and your estimated value.
A contemporaneous log carries far more weight than a reconstruction if the IRS ever questions your numbers. It also lets you challenge an allocated tip figure later, which matters at larger restaurants.
Report Tips to Your Employer Each Month
If tips from a single employer reach $20 or more in a calendar month, you owe that employer a written report of the total.7Office of the Law Revision Counsel. 26 USC 6053 – Reporting of Tips The deadline is the 10th of the next month. January’s tips are due by February 10.8eCFR. 26 CFR 31.6053-1 – Report of Tips by Employee to Employer If the 10th falls on a weekend or legal holiday, you get until the next business day.9Office of the Law Revision Counsel. 26 USC 7503 – Time for Performance of Acts Where Last Day Falls on Saturday, Sunday, or Legal Holiday
Many workplaces use Form 4070 from Publication 1244 or an electronic payroll portal, but the IRS doesn’t require a specific form. Any signed written statement works as long as it shows your name, address, and Social Security number, your employer’s name and address, the period covered, and the total tips.4Internal Revenue Service. Tip Recordkeeping and Reporting
The $20 threshold applies per employer, per month. Two tipped jobs paying $15 each in the same month don’t trigger a report to either employer. Those tips are still taxable; they get picked up on your annual return instead.
What Your Employer Does With That Report
The tips you report are added to your regular wages for withholding. Your employer takes out the 6.2 percent Social Security tax and 1.45 percent Medicare tax, plus federal income tax based on your W-4.10Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates
If your hourly pay is low and your tips are high, a common situation at the tipped minimum wage, your paycheck may not hold enough cash to cover all the tax due on your reported tips. When that happens, your employer withholds what it can and reports the uncollected Social Security and Medicare tax on your W-2 using codes A and B in Box 12.11Internal Revenue Service. Form 4137 – Social Security and Medicare Tax on Unreported Tip Income You pay the shortfall with your return through Schedule 2. Watch your pay stubs during the year so this doesn’t blindside you in April.
Allocated Tips at Larger Restaurants
If you work at a food or beverage establishment that normally employs more than ten people on a typical business day, and the tips reported by everyone at the restaurant during a pay period add up to less than 8 percent of gross receipts, your employer allocates the shortfall among tipped workers.7Office of the Law Revision Counsel. 26 USC 6053 – Reporting of Tips
Allocated tips appear in Box 8 of your W-2. Your employer does not withhold income tax, Social Security, or Medicare on them, so the full tax bill lands on you at filing time.4Internal Revenue Service. Tip Recordkeeping and Reporting You report the allocated amount as income and calculate the Social Security and Medicare tax on Form 4137.
There’s one exception. If your daily log shows you actually received less than the amount your employer allocated, you can report the smaller, accurate figure. Without that log, you’re stuck with the allocation whether it reflects reality or not.
Reporting Tips on Your Annual Tax Return
Most of the tips you reported to your employer during the year are already inside your W-2, in Box 1 (wages, tips, and other compensation) and Box 7 (Social Security tips). Several categories need separate handling.
Form 4137 for Unreported and Allocated Tips
Any tips you didn’t report to your employer, whether because they were under the $20 monthly threshold, because you missed reporting them, or because they came through as allocated tips in Box 8, go on Form 4137.11Internal Revenue Service. Form 4137 – Social Security and Medicare Tax on Unreported Tip Income The form calculates the Social Security and Medicare tax on those amounts. The tip income itself is added to line 1c of Form 1040, and the calculated tax flows onto Schedule 2.12Internal Revenue Service. About Form 4137, Social Security and Medicare Tax on Unreported Tip Income Non-cash tips get added to your wages here too.
Reporting through Form 4137 also feeds your lifetime Social Security earnings record, which determines your future benefits.
Additional Medicare Tax at Higher Incomes
Once combined wages and tips pass $200,000 in a year ($250,000 for married couples filing jointly, $125,000 for married filing separately), an extra 0.9 percent Medicare tax applies to the amount above the threshold.13Internal Revenue Service. Topic No. 560, Additional Medicare Tax Employers begin withholding it at $200,000 regardless of filing status, and you reconcile the actual amount on your return.
Estimated Payments or Extra Withholding
If withholding regularly falls short and you expect to owe $1,000 or more after credits, you’re supposed to make quarterly estimated tax payments using Form 1040-ES.14Internal Revenue Service. Estimated Taxes A simpler option for most tipped employees: file a new W-4 asking your employer to withhold an extra amount from each paycheck.
Penalty for Skipping the Monthly Report
Failing to report tips to your employer carries a penalty of 50 percent of the Social Security and Medicare tax that should have been paid on the unreported amount, on top of the tax itself.15Office of the Law Revision Counsel. 26 USC 6652 – Failure to File Certain Information Returns, Registration Statements, Etc. The penalty can be waived for reasonable cause, but forgetfulness rarely qualifies.
Employers at larger food and beverage establishments file annual reports comparing total reported tips against 8 percent of gross receipts. A wide gap can prompt the IRS to look more closely at individual employees, so keeping your daily record and filing an honest monthly report is the best way to stay clear of both the penalty and a closer look.