How to Handle Tips and Gratuities for Tax Purposes
If you work in an industry where tips are common, understanding your tax obligations is essential. Here's what you need to know.
Tips and Taxes
Tips Are Taxable Income
All tips received — cash, credit card, or via tip-sharing arrangements — are taxable income.
Employee Responsibilities
- Keep a daily record of tips received
- Report all tips to your employer if total exceeds $20 in a month
- Use Form 4070 or a written statement to report to employer
- Your employer includes reported tips on your W-2
Unreported Tips
- Unreported tips must still be included on your tax return
- The IRS can match tip income to what similar workers in your industry report
Allocated Tips
If you work in a large food or beverage establishment and reported less than 8% of your share of sales, your employer may allocate additional tips to you (shown in Box 8 of W-2). These are still taxable.
Tip Credit for Employers
Employers who pay FICA taxes on employees' tip income may be eligible for the FICA Tip Credit (Form 8846).
Non-Cash Tips
Non-cash tips (tickets, goods, services) are taxable at their fair market value but are not subject to FICA withholding.
Work in a tipped industry? Make sure you're tracking and reporting tips correctly to avoid IRS scrutiny.