A Guide to

Tip Income Reportin

for Employees in the

Food and Beverage Industry
2

If you wait tables,

bus tables, park cars, bar

serve cocktails, deliver foo

entertain, this guide is for 

As an employee of a food and beverage estab

the tip income you receive — whether cash or 

a charge — is taxable income. As income, these ti

to federal income tax, social security and Med

and may be subject to state income tax a

The Internal Revenue Service (IRS) has p

this guide to aid the employee who may need 

tip income-reporting questions.
3

I have to report?

among all tipped emp

employee reported le

cated amount to the e

allocated amount wil

individual’s Form W-

Tax Statement, in the 

cated Tips.

◆

Sometimes I don’t 

from customers, bu

another employee. 

report those tips?

Yes. Employees who 

another employee are 

report “tip-outs.” Emp

disburse tips out of th

to another employee 

Remember, all tips a

◆

Do I have to report 

I pay to other empl

No. You report to you

the amount of tips yo

you must maintain re

with your other tip in

charged tips, split tip

Do I have to report all my tips to

my boss?

If you received $20.00 or more in tips

in any one month, you should report

all your tips to your employer so that

federal income tax, social security

and Medicare taxes, and maybe state

income tax can be withheld.

◆

Do I have to report all my tips on

my tax return?

Yes. All tips are income and should be

reported on your tax return.

◆

I was told that I had to report only

eight percent (8%) of my total sales

as tips. Is this true?

No. You must report to your employer

all (100%) tips you receive, except

for the tips from any month that do

not total at least $20.00. The 8% allocation rule is a requirement placed on

the employer.

Here’s how the 8% rule works:

The employer has to determine if

the employees have reported tips in

the aggregate of at least 8% of the

establishment’s gross sales subject to

tipping. To put it another way, the

employer adds all the establishment’s

gross receipts (sales where tipping is

involved). Then the employer figures

8% of that number. If all the employees’

reported-tips total less than that 8%

figure, the employer figures out the

difference between what the employees

reported and the 8% amount. The

employer then allocates that difference
4

do I need to keep?

What type of records do I have

to keep?

You must keep a running daily log

of all your tip income. You can use

Publication 1244, Employee’s Daily

Record of Tips and Report to Employer,

to record your tip income for one year.

Publication 1244 includes Form 4070,

Employee’s Report of Tips to Employer,

and Form 4070A, Employee’s Daily

Record of Tips. These forms have

spacing for you to log your name, the

employer’s name and address, date

tips were received, date of entry, tips

received, tips paid out, and name of

employee paid. For a free copy of

Publication 1244, call the IRS at

1-800-829-3676. Your daily log would

be your best proof should your income

tax return be questioned.

◆

What can happen if I do not keep

a record of my tips?

If it is determined in an examination

that you underreported your tip

income, the IRS will assess the taxes

you owe based on the best available

records of your employer. Tip income

adds up. Underreporting could result

in your owing substantial taxes,

penalties, and interest.

If I report all my tip

employer, do I still 

records?

Yes. You should keep 

tips so that in case of 

you can substantiate 

of tips received. Ther

reasons why you mig

■ Your return could b

selected for a federal 

examination.

For example: Your Fo

Individual Income Ta

lishes that you have y

two cars, and three ex

your Form W-2 show

only $10,000 in incom

nario, an examinatio

examiner determines 

have been underrepo

■ A tip examiner cou

employer’s books and 

examination could re

tip income that you m

verify.

■ An Internal Revenu

may run a match of y

information from you

U.S. Individual Incom

with the income info

Form W-2. If these fig

match, you could rec

the discrepancy and 

nation of your tax ret
5

income tax filing?

I forgot to report my tip income to

my employer, but I remembered to

report it on my federal income tax

return. Will that present a problem?

If you do not report your tip income to

your employer, but you do report the

tip income on your federal income tax

return, you may owe a 50% social

security and Medicare tax penalty and

be subject to a negligence penalty and

possibly an estimated tax penalty.

When you don’t report your tips to your

employer, it places your employer at

risk of possible assessment of the

employer’s share of social security and

Medicare taxes.

◆

If I report all my tips but my taxes

on the tips are greater than my pay

from my employer, how do I pay

the remaining taxes?

You can either pay the tax when you

file your federal income tax return or

you can reach into your tip money and

give some to your employer to be

applied to those under-withheld taxes.

The employer will then record these

taxes and you will get credit on your

Form W-2. If you wait to pay when you

file your tax return, you may be subject

to an estimated tax penalty.

What can happen if I don’t report

my tips to the IRS?

If the IRS determines through an

examination that you underreported

your tips, you could be subject to

additional federal inc

security and Medicar

maybe state income t

of 50% of the addition

and Medicare taxes, a

penalty of 20% of the 

tax, plus interest, ma

◆

What’s in it for me 

tip income?

There are many good 

want to report all you

■ Increased income m

financing approval w

mortgage, car, and ot

■ Increased worker’s 

benefits, should you g

■ Increased unemplo

tion benefits

■ Increased social se

care benefits (the mo

greater your benefits)

■ Increased employe

ity, or 401(k) particip

■ Check with your em

increased benefits (b

company may offer, s

ance, disability, and t

chase stock options.

■ Compliance with th
6

program Ive heard ab

My employer has entered into a

compliance agreement with the

IRS concerning tips. What is this?

The national Tip Rate Determination/

Education Program was developed in

1993 to help those employees receiving

tip income and their employers understand the laws on reporting tip income.

Under this program, the employer can

enter into one of two arrangements —

the Tip Rate Determination Agreement

(TRDA) or the Tip Reporting Alternative Commitment (TRAC) (created in

June 1995). You can ask your employer

for more information about this program.

◆

TRDA

What is my responsibility, as an

employee, under the Tip Rate

Determination Agreement?

You are required to file your federal

tax returns. You must sign a Tipped

Employee Participation Agreement

proclaiming that you are participating

in the program. The employer, as a

participant in the TRDA, has agreed

with the IRS to a tip rate for the

employer’s establishment. To stay a

participating employee, you must

report tips at or above the tip rate

determined by the agreement. Further,

as part of the TRDA arrangement, the

employer is required to report your

name, social security number, the

hours worked or sales made, your job

classification, and your reported tips to

the IRS if you do not report tips at or

above the determined tip rate.

TRAC

What is my respons

employee, under th

Alternative Commit

Directly-tipped em

■ Your employer will 

written statement (at 

reflecting your charg

■ You are to verify or 

statement.

■ You are to indicate 

cash tips received.

■ When reporting you

you should remembe

correlation between c

cash tips.

(Your employer may 

you of the establishm

sales to cash sales ra

if the establishment i

and 50% cash, and yo

reported $100 in tips 

receipts, it is reasona

you should be report

in cash tips.)

■ You may be asked t

name and amount of 

indirectly-tipped emp

Indirectly-tipped e

■ You are required to 

tips to your employer

ment has the directly

provide the name an

shared with you, the 

could provide you wi

tips that you would n

correct.
7

food & beverage indus

Does tip income reporting apply

only to employees in the food and

beverage industry?

No. Anyone who receives tip income is

required by law to report it to his or her

employer. The Tip Rate Determination/

Education Program (TRD/EP) was

first promoted in the gaming industry

(casino industry) in Las Vegas, Nevada,

and subsequently spread to the food

and beverage industry. Other individuals that receive tip income include airport skycaps, bartenders, hair stylists,

bellhops, casino workers, delivery service people, hotel housekeepers, manicurists, masseuses, parking attendants,

railroad redcaps, and taxi drivers.

◆

Why should I report my tips to

my employer?

When you report your tip income to your

employer, the employer is required to

withhold federal income taxes, social

security and Medicare taxes, and maybe

state income tax. Tip reporting may

increase your social security credits

resulting in greater social security and

Medicare benefits when you retire.

Tip reporting may also increase other

benefits to which you may become

entitled, such as unem

efits, worker’s compen

ment benefits. Additio

income may improve 

for mortgage, car, and 

◆

Why has tip reporti

such an issue?

To report all tip incom

been the law. The IRS 

emphasis on reportin

the past few years bec

number of taxpayers a

all tip earnings as inc

◆

How can I get more 

The IRS provides the 

publications and form

income reporting. Th

be downloaded from 

www.irs.ustreas.gov an

the IRS by dialing 1-8

(For TTY/TDD equipm

1-800-829-4059.) You 

forms with instruction

to you when you dial 

from a fax machine a

voice prompts.

Pub 505 – Tax Withhold

Tax

Pub 531 – Reporting Tip 

Pub 1244 – Employee’s D

and Report to Employers

includes Form 4070, Em

Tips to Employer, and Fo

Employee’s Daily Record 

Form 1040ES – Estimate

Form 4137 – Social Secu

Tax on Unreported Tip In
Publication 1872 (Rev.5-99)

Catalog Number 22209J