All tips you receive are considered income and are subject to federal income
tax. You must include in gross income all tips you receive directly from customers,
tips from charge customers that are paid to you by your employer, and your
share of any tips you receive under a tip–splitting arrangement with
fellow employees. The value of non–cash tips, such as tickets, passes
or other items of value, is also income and subject to federal income tax.
If your employer reports allocated tips in Box 8 of your Form W-2 (PDF), you should report the allocated tips on Form 1040 (PDF), unless you have adequate records to show
that you received a different amount. Do not include as a tip any service
charge that your employer adds to a customer's bill and then pays to you and
treats as part of your wages.
If you receive tips of $20 or more in any one month
from any one job, you must report the total tips to that employer by the tenth
day of the next month.
You must report tips to your employer so your employer can withhold federal
income tax and social security and Medicare taxes or railroad retirement tax
on your tips. Any tips you reported to your employer are included in the wages
on your Form W–2. Report to your employer only cash, check,
or credit card tips you receive.
If you did not report tips to your employer, you must report them as income
on your return, and you may owe social security and Medicare taxes on them.
Complete Form 4137 (PDF) Social Security and
Medicare Tax On Unreported Tip Income and attach the form to your return.
Include the amounts from Form 4137 on the appropriate lines of Form
1040. If you do not report tips to your employer as required, you may
be subject to a penalty equal to 50% of the employees' Social Security and
Medicare taxes, or Railroad Retirement taxes, in addition to the tax you owe.
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 uncollected
by your employer at the end of the year, the amount will be shown in Box 12
of Form W-2. File Form 1040 and include the taxes in your
total tax amount and write "UT" and the total on the dotted line.
If you receive tips of less than $20 during any one
month from any one job, you do not have to report these tips to that employer,
but you must include the tips in your income.
For more information, refer to Publication 531, Reporting Tip Income.
Publication 1244 (PDF), which contains Form 4070A, Employee's
Daily Record of Tips to Employer, and Form 4070, Employee's
Report of Tips to Employer, should also be helpful to you.
