Reporting Gratuities to the IRS

For those of you who are regularly employed in the restaurant or service industry, you already know how customary tips are taxable income. If you’re new to the service profession, either as a part-time, full-time, or seasonal worker, you should be aware that it is your responsibility to report income from tips on your personal tax return.

You are required by the IRS to report direct tips, charged tips paid by your employer, and any shared tips under an employer’s tip-pooling arrangement. Even if you receive cash tips directly from a customer, you must report it to your employer in order to properly withhold taxes - like Social Security or Medicaid.

As mentioned earlier, tip income is taxable income, which is required to be reported during tax season. Here are some “tips” from the IRS about how to properly report.

Keep a Daily Tip Record
A daily tip record will help maintain and track your compliance with the IRS requirements, and more importantly, it will suffice as proof of your tax income. Any tips that you receive - cash, debit, credit, or check - have to be reported monthly to your employer. The only exception is if you happen to make less than $20 in tips for that month.

Report Tips to Employer
There are a number of ways in which you can report your tips to your employer. The IRS can supply you with a Form 4070, Employee’s Report of Tips to Employer; this can be used to report tips when they are due - the 10th of every month. You’ll be reporting tips collected, in full, for the previous month.
If you can’t get a Form 4070, you create your own written statement or tip report with the following information:
  • Month or time period the report covers
  • Total tips received for that time period
  • Employer’s name, address, and business name
  • Employee’s name, address, and Social Security Number (SSN)
Be sure that your report is signed and dated - you’ll also want to keep a copy for your own records as well.

Important: Your tip report or statement can only cover a period of one full month; however, employers may require you to report your tips numerous times per month.

IRS Penalties
If you fail to report tip income, you could be charged 50% of the Social Security, Medicaid, or any other retirement taxes owed through unreported tips - in addition to other taxes owed. You can appeal the penalty by proving reasonable cause with a statement attached to your tax return as to why you didn’t report your tips.

Reporting Tips on a Tax Return
Tips that have been reported, or not reported, to your employer will go into Box 1 of your W-2; this also includes any non-cash tips like tickets or event passes - simply add the non-cash values to your cash amounts.
You are required to list your tips with wages on the most appropriate tax return for you:
  • Form 1040 - Line 7
  • Form 1040-A - Line 7
  • Form 1040-EZ - Line 1 
  • Form 1040-NR - Line 8 
  • Form 1040-NR-EZ - Line 3
If you’ve received any tips as a self-employer, you must report those as income with Schedule C of Form 1040, Profit or Loss from Business.

Keeping up with your tips can be made simple, but if you find yourself having to backtrack a great deal, why not extend your time to file? With a personal tax extension from ExpressExtension, you can automatically receive six extra months, which you can use to get your tip reports organized.

Our friendly, live e-filing professionals in Rock Hill, South Carolina are more than happy to assist you with your e-filing experience. Feel free to contact us at (803) 514-5155, Monday through Friday from 9 a.m. to 6 p.m. EST. You can even send us a message with our 24/7 email support,

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