Tips include:

• Cash tips received directly from customers.
• Tips from customers who pay the tip electronically, or through an electronic system. This includes payments by credit card, debit card, gift card, or any other electronic payment method.
• The value of tips given in forms other than cash, such as tickets or tickets, or other item of value.
• Tips received from other employees as part of tip pools, tip sharing plans, or other formal or informal way to share tips.

All tips received by the employee, whether cash or not, are considered income and therefore are subject to federal income taxes. All tips the employee receives in cash in any calendar month are subject to Social Security and Medicare taxes, and must be reported to the employer If the total of tips the employee received during a calendar month for a single The employer is less than $ 20, then you are not required to report such tips and you do not have to withhold tax on those tips. Cash tips are all tips received from customers, electronic tips (paid for example by credit or debit card), tips distributed to the employee by that employee's employer, and tips received from other employees as part of any tip sharing arrangement. . Additionally, tips include tips received from employees who received such tips both directly and indirectly.

Employee responsibilities

As a tipped employee, you must do the following three things:

1. Keep a daily tip log.
2. Report tips to your employer, unless the total is less than $ 20 per month for each employer.
3. Report all tips on your personal income tax return.

Keep a daily tip log

Employees must keep a daily record of tips they receive. You can use Form 4070A, Daily Employee Tip Record, in English, which can be found on the Publication 1244. In addition to the information listed on Form 4070A, you must also record the date you receive any non-cash tips, such as tickets, tickets, passes, or other items of value. Although you do not report these tips to your employer, you must report them on your tax return.

Report tips to your employer, unless the total is less than $ 20 per month per employer

The Internal Revenue Code requires employees to report all cash tips received, except for tips for each month that do not total at least $ 20, to their employers in writing. Cash tips are all tips received from customers, electronic tips (for example paid by credit or debit card), tips distributed to the employee by his employer, and tips received from other employees as part of any tip sharing arrangement. There is no specific form to use; however, the declaration must include:

• The employee's signature,
• The name, address, and Social Security number of the employee,
• The name and address of the employer (or business name, if different).
• The month or period covered by the report and
• The total of tips received in that month or period.

The employee can use any document that has the items indicated above, such as Form 4070, Daily Record of Tips for Employees, in English, (available only as part of the Publication 1244, Employee Daily Tip Record and Report to Employer, some form provided by the employer or an electronic system provided by your employer to report your tips.

Report all tips on your personal income tax return

The employee must use the Form 4137, Social Security and Medicare Tax on Unreported Tip Income, to report the amount of any tips not already reported, and include them as additional wages on your Form 1040, United States Tax Return on Personal Income o Form 1040-SR, United States Tax Return for Persons 65 Years of Age or Older, and the employee's portion of Social Security and Medicare tax owed on such tips.

When to report tips to your employer

Employees must report their tips to the employer by the 10th day of the month following the month in which they received the tips. For example, the employee must report the tips received in August 2020 to his employer on or before September 10, 2020. If the 10th falls on a Saturday, Sunday, or official holiday, the employee can deliver the report to the employer the next day that is not Saturday, Sunday or official holiday. The employer can force employees to report tips more frequently than once a month. However, the written statement cannot cover more than one calendar month of the year.

Do not include service charges in your daily tip record

Charges that your employer adds to customer accounts, such as large group charges, and then distributes to you as an employee should not be included in your daily tip record. These additional charges that your employer adds to the customer's accounts are not considered tips; as they are service charges. These service charges are wages that are not tips, and are subject to Social Security and Medicare tax and federal income tax withholding.

Whether the employer or employee considers a payment to be a "tip" does not determine whether it is actually considered a tip. Service charges distributed to the employee (often known as “automatic tips” in the service industry) should be considered wages that are not tips. The Administrative Tax Resolution 2012-18 it reaffirms the data that one has to consider to determine if the payment was made by way of tip or service charge. The answer to Question 1 in the Tax Administrative Resolution 2012-18 indicates that the lack of any One of the following conditions casts doubt that the payment was an actual tip, and indicates that the payment may have been a service charge:

• Payment must be made freely, without any obligation;
• The customer must retain the unlimited right to determine the amount of the payment,
• Payment must not be able to be negotiated or dictated by employer policies; Y
• Generally, the customer has the right to determine who receives the payment.

See the example below.

Example: A restaurant menu indicates that a charge at a rate of 18% is added to the accounts of customers who come in groups of 6 or more. Dana's food and beverage account for her group of 8 includes an amount on the “tip line” equal to 18% of the food and beverage price, and the total noted on the bill includes that amount. The restaurant distributes this amount to the waitress and assistants to the waitresses. Given these circumstances, Dana did not have an unlimited right to determine the amount of the payment, as it was dictated by employer policy. Dana did not make the payment freely and without obligation. The 18% charge is not a tip. Rather, the amount listed on the tip line is a service charge dictated by the restaurant.

Reporting Tips Your Employer Assigns You

If the total tips reported by all employees in a large food or beverage business (as defined below) is less than 8 percent of gross receipts (or a lower rate approved by the IRS), then the employer You must distribute to all tipped employees an amount that represents the difference. If your employer distributes tips to you, then the tips distributed are shown separately in box 8 of your Form W-2. They are not included in box 1 (Wages, tips and other compensation), box 5 (tips and wages subject to Medicare tax) and box 7 (tips subject to Social Security tax) of Form W-2, Proof of Salaries and Taxes.

Generally, you must report the tips your employer has distributed to you on your income tax return. Attach the Form 4137, Social Security and Medicare Tax on Unreported Tip Income,  Form 1040 (SP) or Form 1040-SR (SP), to report the tips that your employer has distributed to you (from box 8 of Form W-2). Other tips not reported to the employer must also be reported on Form 4137. However, it is not necessary to report the tips your employer distributes to you on the federal income tax return, if you have sufficient records to show that during during the year he received fewer tips than those that were distributed to him.

Employer responsibilities

The employer has several obligations regarding the tips that its employees receive as income. These include keeping records, and the responsibility of reporting and collecting taxes on tips, filing certain forms, and paying or depositing taxes.

Employers are required to keep reports of tips that their employees receive. Additionally, employers are required to withhold taxes (including income taxes and the employee's portion of Social Security and Medicare taxes) based on the income from wages and tips received by the employee, and deposit those taxes. Additionally, employers are required to pay the employer's share of Social Security and Medicare tax, calculated on the total wages paid to tipped employees, in addition to the tips reported by them. Finally, the employer reports this information and taxes to the IRS on the appropriate forms.

The tips that the employee declares to the employer must be included in box 1 (Wages, tips and other compensation), box 5 (tips and wages subject to Medicare tax) and box 7 (tips subject to Social Security tax) of Form W-2, Proof of Employee Wages and Taxes. Enter the amount of Social Security and Medicare tax that was not collected in box 12 of Form W-2. For more information, see the General Instructions for Forms W-2 and W-3.

Employers must report the income tax, Social Security tax, and Medicare tax they have withheld from the employee's wages, and the employer's share of Social Security and Medicare taxes, on the Form 941, Employer's Quarterly Federal Statement, and deposit them according to the requirements of the federal tax deposit.

Most employers are also responsible for filing the Form 940, Employer's Annual Declaration for Unemployment Tax (FUTA), and to deposit said taxes. Only the employer pays FUTA taxes, they are not withheld from employees' wages.

The employer's share of the Social Security and Medicare tax on undeclared tips

If an employee does not report their tips to their employer, then the employer is not responsible for paying the employer's share of the Social Security and Medicare tax on such unreported tips; until the IRS issues a notice and demand for the tax to the employer. The Employer is not responsible for withholding and paying the employee's share of Social Security and Medicare taxes on undeclared tips.

For more information regarding the Notice and Complaint under Section 3121 (q), see the Administrative Tax Resolution 2012-18, which sets additional guidelines on Social Security and Medicare tax on tips.

Additional Medicare tax on tips

Beginning in 2013, a 0.9% additional Medicare tax applies to wages subject to Medicare, and the employer is required to withhold this additional Medicare tax on any wages subject to Medicare, or compensation subject to retirement. Railroad (RRTA) that pays an employee in excess of $ 200,000 during a calendar year; regardless of marital status for the purposes of the employee's declaration. The additional Medicare tax applies only to the employee. There is no employer share of the Additional Medicare Tax.

All wages and compensation that are subject to Medicare tax are subject to additional Medicare tax, if they were paid in excess of the $ 200,000 limit. Tips are subject to additional Medicare tax withholding if, when combined with other wages or other RRTA compensation paid by the employer, they exceed the $ 200,000 limit.

For more information, see the Tax Topic 560 - Additional Medicare Tax.

Distributed service charges

Service charges distributed to employees should be treated as if they were the wages of those employees. The employer must keep a record of the employee's name, address, and Social Security number; the amount and date of each payment, and the amount of income tax, Social Security, and Medicare that was withheld in respect of that payment.

During an audit, the IRS may ask the employer to demonstrate how sales that are subject to service charges are distinguished from those that are subject to tips. Auditors may request records of Point of Sale (Place of Sale, or POS), such as summary reports of completed sales. To further verify the employer's procedures, auditors can ask for samples of the daily receipts and ask the employer to demonstrate how a complete transaction would be done, from handing over the account to the customer, to the transaction or the sales journal. You can also ask to see how it is linked to payroll and to validate how distributed service charges were paid to employees.

Service charges withheld by the employer are income to the employer

Service charges are charges that the employer collects from customers; therefore, service charges are always income to the employer, regardless of whether the employer distributes all or part of the amount collected from such service charges to its employees. This is distinguished from "tips" that customers voluntarily pay to employees. Tips are not gross income of the employer.

The employer can distribute in any way it chooses, and to the employee it chooses, service charges (sometimes referred to as automatic tips) charged to customers. The employer also has the option of withholding all or part of the service charges. Regardless of whether the service charge is distributed to employees, those amounts are considered gross income to the employer.

Note that the employer may be entitled to a business deduction for service charges distributed to employees, provided all the criteria for a business deduction are met under section 162 of the Internal Revenue Code.

Tip calculations on customer accounts are not service charges

The business is allowed to enter examples of how to calculate tips on customer accounts; According to what was indicated in question number 1 of the list of frequently asked questions of the Administrative Tax Resolution 2012-18. See the example below:

Example: The restaurant enters a calculation of various tip amounts below the signature line on the food and beverage billing accounts it delivers to customers. The line for the tip itself is left blank. Jackie's account shows examples of tips at 15%, 18%, and 20% of the price of food and drink. Jackie enters the amount calculated at 15% on the tip line, and adds that amount to the price of food and drink to calculate the total. Given these circumstances, Jackie was free to enter whatever amount she liked on the tip line, or just leave it blank; therefore, Jackie entered the amount of 15%, with no obligation to do so. Jackie and the restaurant did not negotiate the amount, nor did the restaurant dictate the amount to Jackie. Jackie determined who would receive the amount. The amount Jackie entered on the tip line is a tip and not a service charge.

Voluntary tip compliance agreements

Voluntary tip compliance agreements were established by the IRS for those industries where tipping is typical, such as the restaurant and casino industry. These agreements were designed to increase tax compliance for tipped employees and their employers through taxpayer education rather than typical law enforcement actions such as tip audits. In addition to helping taxpayers understand and fulfill their tip reporting responsibilities, these agreements offer many benefits to both the employer and the employee.

The Internal Revenue Service currently offers employers the opportunity to enter into one of several types of voluntary tip compliance agreements:

• TRAC - Alternative Commitment to the Declaration of Tips
• TRDA - Tip Rate Determination Agreement
• GITCA - Tipping Compliance Agreement for the Gaming Industry

The Understanding Market Division program makes available voluntary tip compliance agreements, for industries where tipping is typical.

Treatment of amounts as service charges

La Administrative Tax Resolution 2012-18, became effective immediately after being published and had retroactive effect. However, given certain limited facts and circumstances regarding amounts paid prior to January 1, 2014, and which were incorrectly classified as tips, when they should have been classified as service charges, the answer to question 1 of the Administrative Tax Resolution 2012-18, according to the Announcement 2012-50. Until the answer to question 1 is applied without retroactive effect, the employer will not have the obligation to pay any additional tax.

In certain limited circumstances, some employers who have a Gaming Industry Tip Compliance Agreement (GITCA) or Tip Rate Determination Agreement (TRDA) in place. English) could receive an extension beyond January 1, 2014. The IRS has determined that employers participating in the GITCA Program or participating with a gambling-related TRDA may request an additional period for such a GITCA or TRDA agreement, before the IRS exercises the answer to question 1 of the Administrative Tax Resolution 2012-18. The IRS requires employers to agree that deferring the treatment of amounts as service charges, pursuant to Administrative Tax Resolution 2012-18, does not make any service charges eligible for the section 45B credit under the Internal Revenue Code. or to be included in the Form 8846, Credit for Employer-Paid Social Security and Medicare Tax on Certain Tips Received by Employees.

Employers operating large food or beverage businesses

File Form 8027

An employer that operates a “large food or beverage business” must file a Form 8027, Employer's Annual Statement to Report Income from Tips and Distributed Tips, to make the employer's annual report declaring their income (receipts) from sales of food and beverages, and the tips that employees report to the employer. Additionally, employers use Form 8027 to determine how many tips have been distributed to tipped employees. As an employer, you must file a Form 8027 for each large food or beverage business you own; therefore, some employers must submit multiple separate Forms 8027s.

A food and beverage business is considered a large business if todas the following conditions apply:

• The food and beverage business is located within the 50 states or the District of Columbia;
• Food and beverages are offered for consumption on the premises (unlike fast food stores);
• Customers typically tip food and beverage business employees; Y
• The employer typically employed more than 10 employees during a normal business day during the preceding calendar year (see Instructions for Form 8027, to determine if you employed more than 10 employees during a normal business day).

How to distribute tips

If the total tips reported by all employees of a large food and beverage business is less than 8 percent of gross income (receipts) (or less than some lower limit approved by the IRS), then the employer should distribute the difference between employees who receive tips. These "distributed tips" are calculated and reported in the Form 8027, Employer's Annual Statement to Report Income from Tips and Distributed Tips. Employers must enter “distributed tips” on the Form W-2, Proof of Wages and Taxes, of the employee in the box titled "allocated tips”(Tips distributed). No income, Social Security or Medicare tax is withheld on distributed tips.