| Pub. 17, Your Federal Income Tax |
2004 Tax Year |
Chapter 7 - Tip Income
This is archived information that pertains only to the 2004 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.
Introduction
This chapter is for employees who receive tips from customers.
All tips you receive are 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 or tip-pooling arrangement.
The value of noncash tips, such as tickets, passes, or other items of value are also income and subject to tax.
Reporting your tip income correctly is not difficult. You must do three things.
-
Keep a daily tip record.
-
Report tips to your employer.
-
Report all your tips on your income tax return.
This chapter will show you how to do these three things and what to do on your tax return if you have not done the first two.
This chapter will
also show you how to treat allocated tips.
Useful Items - You may want to see:
Keeping a Daily Tip Record
Why keep a daily tip record?
You must keep a daily tip record so you can:
-
Report your tips accurately to your employer,
-
Report your tips accurately on your tax return, and
-
Prove your tip income if your return is ever questioned.
How to keep a daily tip record.
There are two ways to keep a daily tip record. You can either:
-
Write information about your tips in a tip diary, or
-
Keep copies of documents that show your tips, such as restaurant bills and credit card charge slips.
You should keep your daily tip record with your personal records. You must keep your records for as long as they are important
for
administration of the federal tax law. For information on how long to keep records, see Publication 552, Recordkeeping for
Individuals.
If you keep a tip diary, you can use Form 4070A, Employee's Daily Record of Tips. To get Form
4070A, ask the Internal Revenue Service (IRS) or your employer for Publication 1244. Publication 1244 includes a year's supply
of Form 4070A. Each
day, write in the information asked for on the form.
If you do not use Form 4070A, start your records by writing your name, your employer's name, and the name of the business
if it is different from
your employer's name. Then, each workday, write the date and the following information.
-
Cash tips you get directly from customers or from other employees.
-
Tips from credit card charge customers that your employer pays you.
-
The value of any noncash tips you get, such as tickets, passes, or other items of value.
-
The amount of tips you paid out to other employees through tip pools or tip splitting, or other arrangements, and the names
of the employees
to whom you paid the tips.
Do not write in your tip diary the amount of any service charge that your employer adds to a customer's bill and then pays
to you and treats as
wages. This is part of your wages, not a tip.
Electronic tip record.
You may use an electronic system provided by your employer to record your daily tips. You must receive and keep a
paper copy of this record.
Reporting Tips to Your Employer
Why report tips to your employer?
You must report tips to your employer so that:
-
Your employer can withhold federal income tax and social security and Medicare taxes or railroad retirement tax,
-
Your employer can report the correct amount of your earnings to the Social Security Administration or Railroad Retirement
Board (which
affects your benefits when you retire or if you become disabled, or your family's benefits if you die), and
-
You can avoid the penalty for not reporting tips to your employer (explained later).
What tips to report.
Report to your employer only cash, check, debit or credit card tips you receive.
If your total tips for any one month from any one job are less than $20, do not report the tips for that month to
that employer.
Do not report the value of any noncash tips, such as tickets or passes, to your employer. You do not pay social
security and Medicare taxes or railroad retirement tax on these tips.
How to report.
If your employer does not give you any other way to report tips, you can use Form 4070. Fill in the
information asked for on the form, sign and date the form, and give it to your employer. To get a year's supply of the form,
ask the IRS or your
employer for Publication 1244.
If you do not use Form 4070, give your employer a statement with the following information.
-
Your name, address, and social security number.
-
Your employer's name, address, and business name (if it is different from the employer's name).
-
The month (or the dates of any shorter period) in which you received tips.
-
The total tips required to be reported for that period.
You must sign and date the statement. You should keep a copy with your personal records.
Your employer may require you to report your tips more than once a month. However, the statement cannot cover a period
of more than one calendar
month.
Electronic tip statement.
Your employer can have you furnish your tip statements electronically.
When to report.
Give your report for each month to your employer by the 10th of the next month. If the 10th falls on a Saturday, Sunday,
or legal holiday, give
your employer the report by the next day that is not a Saturday, Sunday, or legal holiday.
Example 1.
You must report your tips received in May 2005 by June 10, 2005.
Example 2.
You must report your tips received in June 2005 by July 11, 2005. July 10th is on a Sunday, and the 11th is the next day that
is not a Saturday,
Sunday, or legal holiday.
Final report.
If your employment ends during the month, you can report your tips when your employment ends.
Penalty for not reporting tips.
If you do not report tips to your employer as required, you may be subject to a penalty equal to 50% of the social
security and Medicare taxes or
railroad retirement tax you owe on the unreported tips. (For information about these taxes, see Reporting social security and Medicare taxes on
tips not reported to your employer under Reporting Tips on Your Tax Return, later.) The penalty amount is in addition to the taxes
you owe.
You can avoid this penalty if you can show reasonable cause for not reporting the tips to your employer. To do so,
attach a statement to your
return explaining why you did not report them.
Giving your employer money for taxes.
Your regular pay may not be enough for your employer to withhold all the taxes you owe on your regular pay plus your
reported tips. If this
happens, you can give your employer money until the close of the calendar year to pay the rest of the taxes.
If you do not give your employer enough money, your employer will apply your regular pay and any money you give to
the taxes in the following
order.
-
All taxes on your regular pay.
-
Social security and Medicare taxes or railroad retirement tax on your reported tips.
-
Federal, state, and local income taxes on your reported tips.
Any taxes that remain unpaid can be collected by your employer from your next paycheck. If withholding
taxes remain uncollected at the end of the year, you may be subject to a penalty for underpayment of estimated taxes. See
Publication 505, Tax
Withholding and Estimated Tax, for more information.
Uncollected taxes.
You must report on your tax return any social security and Medicare taxes or railroad retirement tax that
remained uncollected at the end of 2004. See Reporting uncollected social security and Medicare taxes on tips under Reporting
Tips on
Your Tax Return , later. These uncollected taxes will be shown in box 12 of your 2004 Form W-2 (codes A and B).
Tip Rate Determination and Education Program
Your employer may participate in the Tip Rate Determination and Education Program. The program was developed to help employees
and employers
understand and meet their tip reporting responsibilities.
There are two agreements under the program: the Tip Rate Determination Agreement (TRDA) and the Tip Reporting Alternative
Commitment (TRAC). In
addition, employers in the food and beverage industry may be able to get approval of an employer-designed EmTRAC program.
For information on the
EmTRAC program, see Notice 2001-1 in Internal Revenue Bulletin No. 2001-2 (or Cumulative Bulletin 2001-1).
If you are employed in the gaming industry, your employer may have a Gaming
Industry Tip Compliance Agreement Program. See Revenue Procedure 2003-35 in Internal Revenue Bulletin No. 2003-20.
Your employer can provide you with a copy of the agreement. If you want to learn more about these agreements, contact the
local IRS tip
coordinator. A list of tip coordinators is available at
www.irs.gov.
Reporting Tips on Your Tax Return
How to report tips.
Report your tips with your wages on line 1, Form 1040EZ, or line 7, Form 1040A or Form 1040.
What tips to report.
You must report all tips you received in 2004, including both cash tips and noncash tips, on your tax return. Any
tips you reported to your
employer for 2004 are included in the wages shown in box 1 of your Form W-2. Add to the amount in box 1 only the tips you
did not report to your
employer.
If you received $20 or more in cash and charge tips in a month and did not report all of those tips to your employer, see
Reporting social
security and Medicare taxes on tips not reported to your employer , later.
If you did not keep a daily tip record as required and an amount is shown in box 8 of your Form W-2, see Allocated Tips, later.
If you kept a daily tip record and reported tips to your employer as required under the rules explained earlier, add
the following tips to the
amount in box 1 of your Form W-2.
-
Cash and charge tips you received that totaled less than $20 for any month.
-
The value of noncash tips, such as tickets, passes, or other items of value.
Example.
John Allen began working at the Diamond Restaurant (his only employer in 2004) on June 30 and received $10,000 in wages during
the year. John kept
a daily tip record showing that his tips for June were $18 and his tips for the rest of the year totaled $7,000. He was not
required to report his
June tips to his employer, but he reported all of the rest of his tips to his employer as required.
John's Form W-2 from Diamond Restaurant shows $17,000 ($10,000 wages plus $7,000 reported tips) in box 1. He adds the $18
unreported tips to that
amount and reports $17,018 as wages on his tax return.
Reporting social security and Medicare taxes on tips not reported to your employer.
If you received $20 or more in cash and charge tips in a month from
any one job and did not report all of those tips to your employer, you must report the social security and Medicare taxes
on the unreported tips as
additional tax on your return. To report these taxes, you must file a return even if you would not otherwise have to file.
You must use Form 1040.
(You cannot file Form 1040EZ or Form 1040A.)
Use Form 4137 to figure these taxes. Enter the tax
on line 58, Form 1040, and attach Form 4137 to your return.
If you are subject to the Railroad Retirement Tax Act, you cannot use Form 4137 to pay railroad retirement tax on unreported
tips. To get railroad
retirement credit, you must report tips to your employer.
Reporting uncollected social security and Medicare taxes on tips.
If your employer could not collect all the social security and Medicare taxes or railroad retirement tax you owe on
tips reported for 2004, the
uncollected taxes will be shown in box 12 of your Form W-2 (codes A and B). You must report these amounts as additional tax
on your return. You may
have uncollected taxes if your regular pay was not enough for your employer to withhold all the taxes you owe and you did
not give your employer
enough money to pay the rest of the taxes.
To report these uncollected taxes, you must file a return even if you would not
otherwise have to file. You must use Form 1040. (You cannot file Form 1040EZ or Form 1040A.) Include the taxes in your total
tax amount on line 62,
and write “ UT” and the total of the uncollected taxes on the dotted line next to line 62.
If your employer allocated tips to you, they are shown separately in box 8 of your Form W-2. They are not included in box
1 with your wages and
reported tips. If box 8 is blank, this discussion does not apply to you.
What are allocated tips?
These are tips that your employer assigned to you in addition to the tips you reported to your employer for the year.
Your employer will have done
this only if:
-
You worked in a restaurant, cocktail lounge, or similar business that must allocate tips to employees, and
-
The tips you reported to your employer were less than your share of 8% of food and drink sales.
How were your allocated tips figured?
The tips allocated to you are your share of an amount figured by subtracting the reported tips of all employees from
8% (or an approved lower rate)
of food and drink sales (other than carryout sales and sales with a service charge of 10% or more). Your share of that amount
was figured using either
a method provided by an employer-employee agreement or a method provided by IRS regulations based on employees' sales or hours
worked. For information
about the exact allocation method used, ask your employer.
Must you report your allocated tips on your return?
You must report allocated tips on your tax return unless either of the following exceptions applies.
-
You kept a daily tip record, or other evidence that is as credible and as reliable as a daily tip record, as required under
rules explained
earlier.
-
Your tip record is incomplete, but it shows that your actual tips were more than the tips you reported to your employer plus
the allocated
tips.
If either exception applies, report your actual tips on your return. Do not report the allocated tips. See What tips to report under
Reporting Tips on Your Tax Return, earlier.
How to report allocated tips.
If you must report allocated tips on your return, add the amount in box 8 of your Form W-2 to the amount in box 1.
Report the total as wages on
line 7 of Form 1040. (You cannot file Form 1040EZ or Form 1040A.)
Because social security and Medicare taxes were not withheld from the allocated tips, you must report
those taxes as additional tax on your return. Complete Form 4137, and include the allocated tips on line 1 of the form. See
Reporting social
security and Medicare taxes on tips not reported to your employer under Reporting Tips on Your Tax Return, earlier.
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