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    US Internal Revenue Service: p3148

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    This document provides guidance on reporting tip income for employees who receive tips. It explains that all tip income is taxable and must be reported to your employer. It recommends keeping detailed records of daily tip amounts and payments to other employees. Failing to properly report tip income can result in owed taxes, penalties, and interest if unreported income is discovered in an audit. Accurately reporting tip income provides benefits like higher social security benefits and eligibility for loans.

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    US Internal Revenue Service: p3148

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    IRS
    76 views12 pages
    This document provides guidance on reporting tip income for employees who receive tips. It explains that all tip income is taxable and must be reported to your employer. It recommends keeping detailed records of daily tip amounts and payments to other employees. Failing to properly report tip income can result in owed taxes, penalties, and interest if unreported income is discovered in an audit. Accurately reporting tip income provides benefits like higher social security benefits and eligibility for loans.

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    This document provides guidance on reporting tip income for employees who receive tips. It explains that all tip income is taxable and must be reported to your employer. It recommends keeping detailed records of daily tip amounts and payments to other employees. Failing to properly report tip income can result in owed taxes, penalties, and interest if unreported income is discovered in an audit. Accurately reporting tip income provides benefits like higher social security benefits and eligibility for loans.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    76 views12 pages

    US Internal Revenue Service: p3148

    Uploaded by

    IRS
    This document provides guidance on reporting tip income for employees who receive tips. It explains that all tip income is taxable and must be reported to your employer. It recommends keeping detailed records of daily tip amounts and payments to other employees. Failing to properly report tip income can result in owed taxes, penalties, and interest if unreported income is discovered in an audit. Accurately reporting tip income provides benefits like higher social security benefits and eligibility for loans.

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    Attribution Non-Commercial (BY-NC)
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    of 12

    Tips

    Tip Tips
    Tips
    on

    A Guide to
    Tip Income Reporting
    for Employees

    Who Receive Tip Income

    Department of the Treasury


    Internal Revenue Service

    w w w . i r s . g o v

    Publication 3148 (Rev. 8-2006)


    Catalog Number 26307C
    If you work at a hair salon,

    barber shop, casino, golf course,

    airport, hotel, or perform cleaning,

    food delivery, or taxi cab services,

    and receive tips, this

    guide is for you.

    The tip income you receive as an employee from the services


    such as those listed above — whether cash or included in a
    charge — is taxable income. As taxable income, these tips are
    subject to federal income tax, social security and Medicare
    taxes, and may be subject to state income tax as well.
    The Internal Revenue Service (IRS) has prepared this
    guide to aid the employee who may need answers to tip
    income reporting questions.
    What tips do

    I have to report?

    Do I have to report all my tips to my Sometimes I don’t get tips directly


    boss? from customers, but rather from
    another employee. Do I need to
    If you received $0.00 or more in tips
    report those tips?
    in any one month, you should report
    all your tips to your employer so that Yes. Employees who receive tips from
    federal income tax, social security and another employee are required to report
    Medicare taxes, and maybe state in­ “tip-outs.” Employees often disburse
    come tax can be withheld. tips out of their earned tips to another
    employee (tip-outs). Remember, all tips
    ◆ are taxable income.
    Do I have to report all my tips on
    my tax return? ◆
    Do I have to report tip-outs that I
    Yes. All tips are taxable income and
    pay to other employees?
    should be reported on your tax return.
    No. You report to your employer only
    ◆ the amount of tips you retain. However,
    I was told that I had to report only a you must maintain records of tip-outs
    certain percentage of my total sales with your other tip income (cash tips,
    as tips. Is this true? charged tips, split tips, tip pool).

    No. You must report to your employer


    all (100%) tips you receive, except for
    the tips from any month that do not
    total at least $0.00.

    
    What records

    do I need to keep?

    What type of records do I have to If I report all my tips to my


    keep? employer, do I still have to keep
    records?
    You must keep a running daily log of all
    your tip income. You can use Publica­ Yes. You should keep a daily log of your
    tion 144, Employee’s Daily Record of tips so that in case of an examination,
    Tips and Report to Employer, to record you can substantiate the actual amount
    your tip income for one year. Publica­ of tips received. There are a number of
    tion 144 includes Form 4070, Employ­ reasons why you might need records:
    ee’s Report of Tips to Employer, and
    ■ Your return could be randomly
    Form 4070A, Employee’s Daily Record of
    selected for a federal income tax
    Tips. These forms have spacing for you
    examination.
    to log your name, the employer’s name
    and address, date tips were received, For example: Your Form 1040, U.S.
    date of entry, tips received, tips paid out, Individual Income Tax Return, estab­
    and name of employee paid. Your daily lishes that you have your own home,
    log would be your best proof should two cars, and three exemptions, and
    your income tax return be questioned. your Form W- shows that you earned
    For a free copy of Publication 144, call only $10,000 in income. In this sce­
    the IRS at 1-800-89-676. nario, an examination may occur if
    the examiner determines that income
    ◆ may have been underreported.
    What can happen if I do not keep a ■A tip examiner could review your
    record of my tips? employer’s books and records. The
    If it is determined in an examination examination could reveal unreported tip
    that you underreported your tip income, income that you may later need to verify.
    the IRS will assess the taxes you owe ■ An Internal Revenue Service Center
    based on the best available records of may run a match of your income in­
    your employer. Tip income adds up. formation from your Form 1040, U.S.
    Underreporting could result in you Individual Income Tax Return, with the
    owing substantial taxes, penalties, and income information from your Form
    interest. W-. If these figures do not match, you
    could receive a notice about the discrep­
    ancy and a possible examination of your
    tax return.

    
    How does this affect my

    income tax filing?

    I forgot to report my tip income to What can happen if I don’t report


    my employer, but I remembered to my tips to the IRS?
    record it on my federal income tax
    If the IRS determines through an ex­
    return. Will that present a prob­
    amination that you underreported your
    lem?
    tips, you could be subject to additional
    If you do not report your tip income to federal income tax, social security and
    your employer, but you do record the tip Medicare taxes, and maybe state in­
    income on your federal income tax re­ come tax. Also, a penalty of 50% of the
    turn, you may owe a 50% social security additional social security and Medicare
    and Medicare tax penalty and be sub­ taxes, and a negligence penalty of 0%
    ject to a negligence penalty and possibly of the additional income tax, plus inter­
    an estimated tax penalty. When you do est, may apply.
    not report your tips to your employer, it
    places your employer at risk of possible ◆
    assessment of the employer’s share of What’s in it for me if I report all my
    social security and Medicare taxes. tip income?

    ◆ There are many good reasons why you


    want to report all your tip income:
    If I report all my tips but my taxes
    on the tips are greater than my pay ■ Increased income may improve fi­
    from my employer, how do I pay nancing approval when applying for
    the remaining taxes? larger loan amounts (mortgage, car,
    and other loans)
    You can either pay the tax when you file
    your federal income tax return or you ■ Increased worker’s compensation
    can reach into your tip money and give benefits, should you get hurt on the job
    some to your employer to be applied to
    ■ Increased unemployment compensa­
    those under-withheld taxes. The em­
    tion benefits
    ployer will then record these taxes and
    you will get credit on your Form W-. If ■ Increased social security and Medi­
    you wait to pay when you file your tax care benefits (the more you pay, the
    return, you may be subject to an esti­ greater your benefits)
    mated tax penalty.
    ■ Increased employee pension, annuity,
    or 401(k) participation

    ■ Check with your employer for other


    increased benefits (based on pay) that
    your company may offer, such as life
    insurance, disability payments, and the
    right to purchase stock options

    ■ Compliance with the tax law

    4
    Is tip reporting unique to a

    specific industry?

    Does tip income reporting apply Why has tip reporting become such
    only to employees in a specific an issue?
    industry?
    To report all tip income has always
    No. Anyone who receives tip income been the law. The IRS has put greater
    is required by law to report it to his or emphasis on reporting tip income
    her employer. The Tip Rate Determina­ over the past few years because a sig­
    tion/Education Program (TRD/EP) was nificant number of taxpayers are
    first promoted in the gaming industry not reporting all their tip earnings as
    (casino industry) in Las Vegas, Nevada, taxable income.
    and subsequently to the food and bev­
    erage industry. Other individuals that
    receive tip income include airport sky­
    caps, bartenders, hair stylists, bellhops,
    casino workers, delivery service people,
    golf caddies, hotel housekeepers, mani­
    curists, masseuses, parking attendants,
    railroad redcaps, and taxi drivers.

    ◆
    Why should I report my tips to my
    employer?
    When you report your tip income to
    your employer, the employer is required
    to withhold federal income taxes, social
    security and Medicare taxes, and maybe
    state income tax.
    Tip reporting may increase your social
    security credits resulting in greater
    social security and Medicare benefits
    when you retire. Tip reporting may
    also increase other benefits to which
    you may become entitled, such as un­
    employment benefits, worker’s com­
    pensation, or retirement benefits. Addi­
    tionally, a greater income may improve
    financing approval for mortgage, car,
    and other loans.

    5
    What is this compliance

    program I’ve heard about?

    My employer has entered into a TRDA–What is my responsibility,


    compliance agreement with the as an employee, under the Tip Rate
    IRS concerning tips. What is this? Determination Agreement?

    The Tip Rate Determination/Education You are required to file your federal
    Program was developed in 199 to help tax returns. You may be asked to sign a
    those employees receiving tip income Tipped Employee Participation
    and their employers understand the Agreement proclaiming that you are
    laws on reporting tip income. Under participating in the program. The
    this program, and depending on your employer, as a participant in the TRDA,
    specific business, your employer may has agreed with the IRS to a tip rate for
    enter into one of two arrangements — the employer’s establishment. To stay a
    the Tip Rate Determination Agreement participating employee, you must report
    (TRDA) or the Tip Reporting Alternative tips at or above the tip rate determined
    Commitment (TRAC) (created in June by the agreement. Furthermore, as part
    1995). Ask your employer for more of the TRDA arrangement, the employer
    information about this program. is required to report your name, social
    security number, the hours worked or
    Currently, the TRDA is only available to
    sales made, your job classification, and
    the food and beverage industry and the
    your reported tips to the IRS if you do
    gaming (casino) industry.
    not report tips at or above the deter­
    At this time, TRAC is open to the food mined tip rate.
    and beverage industry and the hair
    styling industry. Ask your employer for
    more information about this arrange­
    ment as it may be extended to other
    industries where tipping is customary.

    6
    TRAC–What is my responsibility, as Indirectly-tipped employee:
    ■ You are required to report all your
    an employee, under the Tip Report­
    ing Alternative Commitment? tips to your employer. If the establish­
    ment has the directly-tipped employee
    Directly-tipped employee: provide the name and amount of tips
    ■ Your employer will furnish you with shared with you, the establishment
    a written statement (at least monthly) could provide you with a statement of
    reflecting your charged tips tips that you would need to verify or
    correct.
    ■You are to verify or correct this state­
    ment

    ■ You are to indicate the amount of cash


    tips received

    ■ When reporting your cash tips, you


    should remember that there is a cor­
    relation between charged tips and cash
    tips.

    (Your employer may be able to inform


    you of the establishment’s charged sales
    to cash sales ratio. For example, if the
    establishment is 50% charge and 50%
    cash, and you received and reported
    $100 in tips on charged receipts, it is
    reasonable to believe that you should be
    reporting close to $100 in cash tips.)

    ■ You may be asked to provide the


    name and amount of any tip-outs to
    indirectly-tipped employees.

    7
    T he IRS provides the following publications
    and forms relating to tip income reporting.
    These products can be downloaded from the
    IRS Web site at www.irs.ustreas.gov and
    ordered through the IRS by dialing
    1-800-89-676. (TTY/TDD equipment access,
    dial 1-800-89-4059)
    Pub 505 - Tax Withholding and Estimated Tax

    Pub 531 - Reporting Tip Income

    Pub 1244 - Employee’s Daily Record of Tips and Report


    to Employer. This publication includes Form 4070,
    Employee’s Report of Tips to Employer, and Form 4070A,
    Employee’s Daily Record of Tips.

    Form 1040ES - Estimated Tax for Individuals

    Form 4137 - Social Security and Medicare Tax on Unre­


    ported Tip Income

    8
    Tips Tips on

    A Guide to
    Tip Income Reporting
    for Employees
    Who Receive Tip Income

    Department of the Treasury


    Internal Revenue Service

    w w w . i r s . g o v

    Publication 3148 (Rev. 8-2006)

    Catalog Number 26307C

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