Chapter 5
Taxable Tips

Tips your employee receives are generally subject to withholding. Your employee must report cash tips to you by the 10th of the month after the month the tips are received. The report should include tips you paid to the employee from charge receipts. Also include tips the employee received directly from customers and other employees, and indirectly (e.g., tip splitting). The report should not include tips the employee paid out to other employees. No report is required for months when tips are less than $20. Your employees report tips on Form 4070, Employee's Report of Tips to Employer, or on a similar statement. They may also use Form 4070-A, Employee's Daily Record of Tips, to keep a record of their tips. Both forms are printed in Pub. 1244, Employee's Daily Record of Tips and Report to Employer, available from the IRS.

The statement must be signed by the employee and must show the following:

• The employee's name, address, and SSN.
• The employer's name and address.
• The month or period the report covers.
• The total tips.

You must collect the employee social security and Medicare taxes on the employee's tips. You can collect these taxes from the employee's wages or from other funds he or she makes available. Stop collecting the employee social security tax when his or her total wages and tips for 2002 reach $84,900. Collect the employee Medicare tax for the whole year on all wages and tips.

You are responsible for the employer social security tax on wages and tips until the wages (including tips) reach the wage base limit. You are responsible for the employer Medicare tax for the whole year on all wages and tips. File Form 941-SS to report withholding on tips.

If, by the 10th of the month after the month you received an employee's report on tips, you do not have enough employee funds available to deduct the employee tax, you no longer have to collect it. Show these tips and any uncollected social security and Medicare taxes on Forms W-2VI, W-2GU, W-2AS, or W-2CM and on lines 6c, 6d, 7a, and 7b of Form 941-SS. Report an adjustment on line 9 of Form 941-SS for the uncollected social security and Medicare taxes.

Note: You are permitted to establish a system for electronic tip reporting by employees. See Regulations section 31.6053-1.

The table on page 19 shows how tips are treated for FUTA tax purposes.

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