Important Reminder
Photographs of missing children. The Internal Revenue Service is a
proud partner with the National Center for Missing and Exploited Children. Photographs of
missing children selected by the Center may appear in this publication on pages that would
otherwise be blank. You can help bring these children home by looking at the photographs
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Introduction
This publication is for employees who receive tips from customers.
All tips you receive are income and are subject to federal income tax. You must include
in gross income all tips you receive directly from customers, tips from charge customers
that are paid to you by your employer, and your share of any tips you receive under a
tip-splitting or tip-pooling arrangement.
The value of noncash tips, such as tickets, passes, or other items of value are also
income and subject to tax.
Reporting your tip income correctly is not difficult. You must do three things.
- Keep a daily tip record.
- Report tips to your employer.
- Report all your tips on your income tax return.
This publication will show you how to do these three things, and what to do on your tax
return if you have not done the first two. This publication will also show you how to
treat allocated tips.
Comments and suggestions. We
welcome your comments about this publication and your suggestions for future editions.
You can e-mail us while visiting our web site at www.irs.gov.
You can write to us at the following address:
Internal Revenue Service
Tax Forms and Publications
W:CAR:MP:FP
1111 Constitution Ave. NW
Washington, DC 20224
We respond to many letters by telephone. Therefore, it would be helpful if you would
include your daytime phone number, including the area code, in your correspondence.
Keeping a Daily Tip Record
Why keep a daily tip record? You must keep a daily
tip record so you can:
- Report your tips accurately to your employer,
- Report your tips accurately on your tax return, and
- Prove your tip income if your return is ever questioned.
How to keep a daily tip record. There are two ways to keep a daily
tip record. You can either:
- Write information about your tips in a tip diary, or
- Keep copies of documents that show your tips, such as restaurant bills and credit card
charge slips.
You should keep your daily tip record with your personal records. You must keep your
records for as long as they are important for administration of the federal tax law. For
information on how long to keep records, see Publication 552, Recordkeeping for
Individuals.
If you keep a tip diary, you can use Form 4070A, Employee's Daily
Record of Tips. To get Form 4070A, ask the Internal Revenue Service (IRS) or
your employer for Publication 1244, Employee's Daily Record of Tips and Report to
Employer. Publication 1244 includes a year's supply of Form 4070A. Each day, write in
the information asked for on the form. A filled-in Form 4070A is shown on this page.
If you do not use Form 4070A, start your records by writing your name, your employer's
name, and the name of the business if it is different from your employer's name. Then,
each workday, write the date and the following information.
- Cash tips you get directly from customers or from other employees.
- Tips from credit card charge customers that your employer pays you.
- The value of any noncash tips you get, such as tickets, passes, or other items of value.
- The amount of tips you paid out to other employees through tip pools or
tip splitting, or other arrangements, and the names of the employees to whom you
paid the tips.
 Do not write in your tip diary the amount of any service charge that your
employer adds to a customer's bill and then pays to you and treats as wages. This
is part of your wages, not a tip.
Electronic tip record. You may use an electronic system
provided by your employer to record your daily tips. You must receive and keep a paper
copy of this record.
Filled-in Form 4070A
Reporting Tips to Your Employer
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 Medicare taxes or
railroad retirement tax,
- 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 pay social security and Medicare taxes or railroad retirement tax on
these tips.
How to report. If your employer
does not give you any other way to report your tips, 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. A sample filled-in Form 4070 is shown
later.
If you do not use Form 4070, give your employer a statement with the following
information.
- 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 tips required to be reported for that period.
You must sign and date the statement. You should keep a copy with your personal
records.
Your employer may require you to report your tips more than once a month. However, the
statement cannot cover a period of more than one calendar month.
Electronic tip statement. Your employer can have you
furnish your tip statements electronically.
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
June 2003 by July 10, 2003.
Example 2. You must report your tips received in
April 2003 by May 12, 2003. May 10th is on a Saturday, and the 12th is the next day that
is not a Saturday, Sunday, or legal holiday.
Final report. If your employment ends during the month, you
can report your tips when your employment ends.
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.
Filled-in Form 4070
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 until the close of the calendar year to pay the rest of the taxes.
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.
- All taxes on your regular pay.
- Social security and Medicare taxes or railroad retirement tax on your reported tips.
- 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 be subject to a penalty for underpayment of estimated taxes. See Publication 505, Tax
Withholding and Estimated Tax, for more information.
Uncollected
taxes. You must report on your tax return any social security and Medicare taxes or
railroad retirement tax that remained uncollected at the end of 2002. 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 12 of your 2002 Form W-2
(codes A and B).
Tip Rate Determination and Education Program
Your employer may participate in the Tip Rate Determination and
Education Program. The program was developed to help employees and employers
understand and meet their tip reporting responsibilities.
There are two agreements under the program - the Tip Rate Determination Agreement
(TRDA) and the Tip Reporting Alternative Commitment (TRAC). In addition,
employers in the food and beverage industry may be able to get approval of an
employer-designed EmTRAC program. For information on the EmTRAC program, see Notice 2001-1
in Internal Revenue Bulletin No. 2001-2 (or Cumulative Bulletin 2001-1).
Your employer can provide you with a copy of the agreement. If you want to learn more
about these agreements, contact the local tip coordinator. A list of tip coordinators is
available at www.irs.gov.
Reporting Tips on Your
Tax Return
How to report tips. Report your tips with your
wages on line 1, Form 1040EZ, or line 7, Form 1040A or Form 1040.
What tips to report. You must report all tips you received in 2002,
including both cash tips and noncash tips, on your tax return. Any tips you reported to
your employer for 2002 are included in the wages shown in box 1 of your Form W-2. Add to
the amount in box 1 only the tips you did not report to your employer.
If you
received $20 or more in cash and charge tips in a month and did not report all of those
tips to your employer, see Reporting social security and Medicare taxes on tips not
reported to your employer, later.
If you did not
keep a daily tip record as required and an amount is shown in box 8 of your Form W-2, see
Allocated Tips, later.
If you kept a daily tip record and reported tips to your employer as required under the
rules explained earlier, add the following tips to the amount in box 1 of your Form W-2.
- Cash and charge tips you received that totaled less than $20 for any month.
- The value of noncash tips, such as tickets, passes, or other items of value.
Example. John Allen began working at the Diamond Restaurant (his
only employer in 2002) on June 30 and received $10,000 in wages during the year. John kept
a daily tip record showing that his tips for June were $18 and his tips for the rest of
the year totaled $7,000. He was not required to report his June tips to his employer, but
he reported all of the rest of his tips to his employer as required. The sample filled-in
forms on page 2 and this page show his daily tip record (Form 4070A) and his report to his
employer (Form 4070) for October.
John's Form W-2 from Diamond Restaurant shows $17,000 ($10,000 wages + $7,000 reported
tips) in box 1. He adds the $18 unreported tips to that amount and reports $17,018 as
wages on line 1 of his Form 1040EZ.
Reporting social security and Medicare taxes on tips not reported to your employer.
If you received $20 or more in cash and charge tips in
a month from any one job and did not report all of those tips to your employer, you must
report the social security and Medicare taxes on the unreported tips as additional tax on
your return. To report these taxes, you must file a return even if you would not otherwise
have to file. You must use Form 1040. (You cannot file Form 1040EZ or Form 1040A.)
Use Form 4137, Social Security and Medicare Tax on
Unreported Tip Income, to figure these taxes. Enter the tax on line 57, Form
1040, and attach the Form 4137 to your return.
Reporting uncollected social security and Medicare taxes on tips. If your employer could not collect all the social
security and Medicare taxes or railroad retirement tax you owe on tips reported for 2002,
the uncollected taxes will be shown in box 12 of your Form W-2 (codes A and B). You
must report these amounts as additional tax on your return. You may have uncollected taxes
if your regular pay was not enough for your employer to withhold all the taxes you owe and
you did not give your employer enough money to pay the rest of the taxes.
To report these uncollected taxes, you must file a return even if you would not
otherwise have to file. You must use Form 1040. (You cannot file Form 1040EZ or Form
1040A.) Include the taxes in your total tax amount on line 61, and write UT and
the total of the uncollected taxes on the dotted line next to line 61.
Allocated Tips
If your employer allocated tips to you, they are shown separately in
box 8 of your Form W-2. They are not included in box 1 with your wages and reported
tips. If box 8 is blank, this discussion does not apply to you.
What are allocated tips? These are tips that your employer assigned
to you in addition to the tips you reported to your employer for the year. Your employer
will have done this only if:
- You worked in a restaurant, cocktail lounge, or similar business that must allocate tips
to employees, and
- The tips you reported to your employer were less than your share of 8% of food and drink
sales.
How were your allocated tips figured? The tips allocated to you are
your share of an amount figured by subtracting the reported tips of all employees from 8%
(or an approved lower rate) of food and drink sales (other than carryout sales and sales
with a service charge of 10% or more). Your share of that amount was figured using either
a method provided by an employer-employee agreement or a method provided by IRS
regulations based on employees' sales or hours worked. For information about the exact
allocation method used, ask your employer.
Must you report your allocated tips on your tax return? You must
report allocated tips on your tax return unless either of the following exceptions
applies.
- You kept a daily tip record, or other evidence that is as credible and as reliable as a
daily tip record, as required under rules explained earlier.
- Your tip record is incomplete, but it shows that your actual tips were more than the
tips you reported to your employer plus the allocated tips.
If either exception applies, report your actual tips on your return. Do not report the
allocated tips. See What tips to report under Reporting Tips on Your Tax
Return, earlier.
How to report allocated tips. If you must report allocated tips on
your return, add the amount in box 8 of your Form W-2 to the amount in box 1. Report the
total as wages on line 7 of Form 1040. (You cannot file Form 1040EZ or Form 1040A.)
Because social security and Medicare taxes were not withheld from the allocated tips,
you must report those taxes as additional tax on your return. Complete Form 4137, and
include the allocated tips on line 1 of the form. See Reporting social security and
Medicare taxes on tips not reported to your employer under Reporting Tips on Your
Tax Return, earlier.
How to request an approved lower rate. Your employer can use a tip
rate lower than 8% (but not lower than 2%) to figure allocated tips only if the IRS
approves the lower rate. Either the employer or the employees can request approval of a
lower rate by filing a petition with the IRS. The petition must include specific
information about the business that will justify the lower rate. A user fee must be paid
with the petition.
An employee petition can be filed only with the consent of a majority of the
directly-tipped employees (waiters, bartenders, and others who receive tips directly from
customers). The petition must state the total number of directly-tipped employees and the
number of employees consenting to the petition. Employees filing the petition must
promptly notify the employer, and the employer must promptly give the IRS a copy of any Form 8027, Employer's Annual Information
Return of Tip Income and Allocated Tips, filed by the employer for the
previous 3 years.
For more information about how to file a petition and what information to include, see
the instructions for Form 8027.
How To Get Tax Help
You can get help with unresolved tax issues, order free publications
and forms, ask tax questions, and get more information from the IRS in several
ways. By selecting the method that is best for you, you will have quick and easy access to
tax help.
Contacting your Taxpayer Advocate. If you have attempted to deal with an IRS problem unsuccessfully, you should
contact your Taxpayer Advocate.
The Taxpayer Advocate represents your interests and concerns within the IRS by
protecting your rights and resolving problems that have not been fixed through normal
channels. While Taxpayer Advocates cannot change the tax law or make a technical tax
decision, they can clear up problems that resulted from previous contacts and ensure that
your case is given a complete and impartial review.
To contact your Taxpayer Advocate:
- Call the Taxpayer Advocate at 1-877-777-4778.
- Call, write, or fax the Taxpayer Advocate office in your area.
- Call 1-800-829-4059 if you are a TTY/TDD user.
For more information, see Publication 1546, The Taxpayer Advocate Service of the
IRS.
Free tax services. To find out what services are available, get
Publication 910, Guide to Free Tax Services. It contains a list of free tax
publications and an index of tax topics. It also describes other free tax information
services, including tax education and assistance programs and a list of TeleTax topics.
 Personal
computer. With your personal computer and modem, you can access the IRS on the
Internet at www.irs.gov. While visiting our web site, you can:
- See answers to frequently asked tax questions or request help by e-mail.
- Download forms and publications or search for forms and publications by topic or
keyword.
- Order IRS products on-line.
- View forms that may be filled in electronically, print the completed form, and then save
the form for recordkeeping.
- View Internal Revenue Bulletins published in the last few years.
- Search regulations and the Internal Revenue Code.
- Receive our electronic newsletters on hot tax issues and news.
- Learn about the benefits of filing electronically (IRS e-file).
- Get information on starting and operating a small business.
You can also reach us with your computer using File Transfer Protocol at ftp.irs.gov.
 TaxFax Service. Using
the phone attached to your fax machine, you can receive forms and instructions by calling 703-368-9694.
Follow the directions from the prompts. When you order forms, enter the catalog number
for the form you need. The items you request will be faxed to you.
For help with transmission problems, call the FedWorld Help Desk at 703-487-4608.
 Phone. Many
services are available by phone.
- Ordering forms, instructions, and publications. Call 1-800-829-3676 to
order current and prior year forms, instructions, and publications.
- Asking tax questions. Call the IRS with your tax questions at 1-800-829-1040.
- Solving problems. Take advantage of Everyday Tax Solutions service by calling
your local IRS office to set up an in-person appointment at your convenience. Check your
local directory assistance or www.irs.gov for the numbers.
- TTY/TDD equipment. If you have access to TTY/TDD equipment, call 1-800-829-4059
to ask tax questions or to order forms and publications.
- TeleTax topics. Call 1-800-829-4477 to listen to pre-recorded messages
covering various tax topics.
Evaluating the quality of our telephone services. To ensure that IRS
representatives give accurate, courteous, and professional answers, we use several methods
to evaluate the quality of our telephone services. One method is for a second IRS
representative to sometimes listen in on or record telephone calls. Another is to ask some
callers to complete a short survey at the end of the call.
 Walk-in. Many
products and services are available on a walk-in basis.
- Products. You can walk in to many post offices, libraries, and IRS offices to
pick up certain forms, instructions, and publications. Some IRS offices, libraries,
grocery stores, copy centers, city and county governments, credit unions, and office
supply stores have an extensive collection of products available to print from a CD-ROM or
photocopy from reproducible proofs. Also, some IRS offices and libraries have the Internal
Revenue Code, regulations, Internal Revenue Bulletins, and Cumulative Bulletins available
for research purposes.
- Services. You can walk in to your local IRS office to ask tax questions or get
help with a tax problem. Now you can set up an appointment by calling your local IRS
office number and, at the prompt, leaving a message requesting Everyday Tax Solutions
help. A representative will call you back within 2 business days to schedule an in-person
appointment at your convenience.
 Mail. You
can send your order for forms, instructions, and publications to the Distribution Center
nearest to you and receive a response within 10 workdays after your request is received.
Find the address that applies to your part of the country.
- Western part of U.S.:
Western Area Distribution Center
Rancho Cordova, CA 95743-0001
- Central part of U.S.:
Central Area Distribution Center
P.O. Box 8903
Bloomington, IL 61702-8903
- Eastern part of U.S. and foreign addresses:
Eastern Area Distribution Center
P.O. Box 85074
Richmond, VA 23261-5074
 CD-ROM for tax
products. You can order IRS Publication 1796, Federal Tax Products on CD-ROM, and
obtain:
- Current tax forms, instructions, and publications.
- Prior-year tax forms and instructions.
- Popular tax forms that may be filled in electronically, printed out for submission, and
saved for recordkeeping.
- Internal Revenue Bulletins.
The CD-ROM can be purchased from National Technical Information Service (NTIS) by
calling 1-877-233-6767 or on the Internet at http://www.irs.gov/cdorders. The
first release is available in early January and the final release is available in late
February.
CD-ROM for
small businesses. IRS Publication 3207, Small Business Resource Guide, is a
must for every small business owner or any taxpayer about to start a business. This handy,
interactive CD contains all the business tax forms, instructions and publications needed
to successfully manage a business. In addition, the CD provides an abundance of other
helpful information, such as how to prepare a business plan, finding financing for your
business, and much more. The design of the CD makes finding information easy and quick and
incorporates file formats and browsers that can be run on virtually any desktop or laptop
computer.
It is available in March. You can get a free copy by calling 1-800-829-3676 or
by visiting the website at www.irs.gov/smallbiz. |
