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 railroad retirement tax or Medicare taxes,
• 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, 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 them to your employer. Do not report the value of any noncash tips, such as tickets or passes, to your employer. You do not have to pay social security and Medicare taxes, or railroad retirement tax on these tips.

How to report. You can use Form 4070, Employee's Report of Tips to Employer. To get a year's supply of the form, ask the IRS or your employer for Publication 1244. Fill in the information asked for on the form, sign and date the form, and give it to your employer.

If you do not use Form 4070, write the following information in your report.

• 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 amount of tips you received.

Then, sign and date the report, and give it to your employer. You should keep a copy of the report with your personal records.

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 January 1999 by February 10, 1999.

Example 2. You must report your tips received in March 1999 by April 12, 1999. April 10 is on a Saturday, and the 12th is the next day that is not a Saturday, Sunday, or legal holiday.

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 to pay the rest of the taxes, up to the close of the calendar year.

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:

1. All taxes on your regular pay,
2. Social security and Medicare taxes or railroad retirement tax on your reported tips, and
3. 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 need to make an estimated tax payment. Use Form 1040-ES, Estimated Tax for Individuals. See Publication 505, Tax Withholding and Estimated Tax, for more information.

You must report on your tax return any social security and Medicare taxes or railroad retirement tax that remained uncollected at the end of 1998. 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 13 of your Form W-2 (codes A and B).

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