Your employees who receive tips of $20 or more in a calendar month
while working for you are required to report to you the total amount of
tips they receive. They must give you a written report by the tenth day
following the month they received the tips. Employees who receive tips
of less than $20 in a calendar month are not required to report their tips
to you for that month.
Employees must report to you tips received directly from customers,
from other employees, and tips that customers charge to their bills. Service
charges that are added to a bill and then paid to your employees are not
considered tips. These service charges are regular wages.
Employees can use Form 4070-A, Employee's Daily Record of Tips,
to keep a daily record of their tips and Form 4070, Employees' Report
of Tips to Employer, to report their tips to you. Both of these forms
are in Publication 1244, Employee's
Daily Record of Tips and Report to Employer.
When you receive the tip report from your employee, use it to figure
the amount of Social Security, Medicare, and income taxes to withhold for
the pay period on both wages and reported tips. You are responsible for
paying the employer Social Security and Medicare tax. You must collect
the employee Social Security and Medicare tax and the income tax. You can
collect these taxes from the employee's wages or from other funds the employee
gives you up to the close of the calendar year. If you don't have enough
money from the employee's wages and other funds, apply them in the following
order. First withhold all taxes due on regular wages. Second withhold Social
Security and Medicare taxes due on reported tips. Finally withhold any
federal, state or local income tax on reported tips. You can withhold any
remaining unpaid taxes from the employee's next paycheck. If you cannot
collect all of the employee's Social Security and Medicare taxes on tips,
show the uncollected amount in Box 13 on the employee's FormW-2, Wage and
Tax Statement. Also show the uncollected amount as an adjustment on your
Form 941, Employer's Quarterly
Federal Tax Return.
When preparing your employee's Form W-2, include the tips reported
to you in Box 1, Wages, tips, and other compensation, Box 3, Medicare wages
and tips, and Box 7, Social Security tips.
When figuring your liability for federal unemployment tax, add the
reported tips to your employee's wages.
If you operate a large food or beverage establishment where tipping
is customary and you normally employ more than ten people on a typical
business day, you must file Form
8027, Employer's Annual Information Return of Tips Income and Allocated
Tips, each calendar year. If you have more than one food or beverage
operation, you must file a separate Form 8027 for each. Form 8027 is due
on the last day of February of the next year and is filed with the Internal
Revenue Service Center, Andover, Massachusetts, 05501.
If the total tips reported by all employees are less than 8 percent
of your gross receipts (unless a lower rate has been approved by the IRS),
you must allocate the difference among the employees who received tips.
The allocation may be based on each employee's share of gross receipts
or share of total hours worked, or on a written agreement between you and
your employees. Show the amount allocated in Box 8 Allocated Tips, of the
employee's Form W-2. Do not withhold income, social security or Medicare
taxes on allocated tips.
If you are required to allocate tips, your employees must continue
to report all tips to you, and you must use the amounts they report to
figure payroll taxes.
For more information on employer responsibilities, see Publication
15, Circular E, Employer's Tax Guide. For more information on
employee responsibilities, see Publication
531, Reporting Tip Income. Publications can be downloaded
from this site, or ordered by calling 1-800-829-3676.
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