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)