Hiring Employees
How to Report Income From Tips/Tip Reporting & Allocation
Tips your employee receives are generally subject to withholding.
Your employee must report cash tips to you by the 10th of the month after the month the
tips are received. The report should include tips you paid over to the employee for charge
customers and tips the employee received directly from customers. No report is required
for months when tips are less than $20. Your employee reports the tips on Form 4070,
Employee's Report of Tips to Employer, or on a similar statement. The statement must be
signed by the employee and must show the following:
- The employee's name, address, and SSN
- Your name and address
- The month or period the report covers
- The total tips
Both Forms 4070 and 4070-A, Employee s Daily Record of Tips,
are included in Pub.
1244, Employee's Daily Record of Tips and Report to Employer.
You must collect income tax, employee social security tax,
and employee Medicare tax on the employee's tips. You can collect these taxes
from the employee's wages or from other funds he or she makes available. Stop
collecting the employee social security tax when his or her wages and tips for
tax year 2001 reach $80,400; collect the income and employee Medicare taxes for
the whole year on all wages and tips.
You are responsible for the employer social security tax on wages
and tips until the wages (including tips) reach the limit. You are responsible for the
employer Medicare tax for the whole year on all wages and tips.
File Form
941 to report withholding on tips. If, by the 10th of
the month after the month you received an employee's report on
tips, you do not have enough employee funds available to deduct
the employee tax, you no longer have to collect it. Show these
tips and the uncollected social security and Medicare taxes on
Form
W-2 and on lines 6c, 6d, 7a, and 7b of Form 941 .
Report an adjustment on line 9 of Form 941 for
the uncollected social security and Medicare taxes.
If an employee reports to you in writing $20 or more of tips in a
month, they are subject to FUTA tax.
Allocated tips. If you operate a large food or beverage
establishment, you must report allocated tips under certain circumstances. However, do not
withhold income, social security, or Medicare taxes on allocated tips. A large food or
beverage establishment is one that provides food or beverages for consumption on the
premises, where tipping is customary, and where there are normally more than 10 employees
on a typical business day during the preceding year.
The tips may be allocated by one of three methods - hours
worked, gross receipts, or good faith agreement. For information
about these allocation methods, including the requirement to file
Form
8027 on magnetic media if 250 or more forms are filed, see
the separate
Instructions
for Form 8027
Important References:
Publication
15
Circular E, Employer's Tax Guide
Form
8027 Employer's
Annual Information Return of Tip Income and Allocated
Tips
Instructions
for Form 8027
Form
941
Employer's Quarterly Tax Return
Form
4070A
Employee's Daily Record of Tips (located on pages
3-6 of Pub. 1244)
Form
4070
Employee's Report of Tips to Employer (located on
pages 7- 10 of Pub. 1244)