All tips you receive must be included in your gross income. This is true whether you receive them directly from customers or whether they are paid to you by your employer from customer charges or whether you receive them from a tip-splitting arrangement with fellow employees. If your employer reports allocated tips separately in box 8 of your Form W-2, you must file Form 1040 to report them. You include the amount of allocated tips in your gross income unless you can prove that you received less. If you have adequate records to show that you received less, see Publication 531, Reporting Tip Income.

Some hotels and restaurants require customers who use the dining or banquet rooms to pay a service charge. Your share of this charge is part of your wages paid by your employer and is not a tip. Remember, all tips received are considered taxable income.

If you receive tips of $20 or more in a month while working for any one employer, you must report the entire amount to that employer by the 10th day of the next month.

If you received tips of $20 or more in any month and did not report them to your employer, you must report them as income on your return, and you may owe social security and Medicare taxes on them.

Calculate the amount of social security and Medicare taxes on Form 4137, Social Security and Medicare Tax on Unreported Tip Income, and attach the form to your return. Include the amount from Form 4137 on the appropriate line of Form 1040. If you are an employee subject to the Railroad Retirement Tax Act, do not file Form 4137 or pay the tax with your income tax return. Instead, contact your employer. Your employer will collect the tax.

If you receive tips of less than $20 during a month while working for one employer, you do not have to report them to that employer. But you must include these tips in income.

Your employer should withhold federal income tax, social security, Medicare tax, or railroad retirement tax on the tips you report. The amount of reported tips should be included on your Form W-2.

If you do not report tips to your employer as required, you may be subject to a penalty, in addition to the tax that you owe.

For more information, see Publication 531, Reporting Tip Income from Tips. Publication 1244, Employee's Daily Record of Tips and Report to Employer, which contains Form 4070-A, Employee's Daily Record of Tips, and Form 4070, Employee's Report of Tips to Employer, should also be helpful to you.

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