What you need to know if you EARN tips | National Restaurant Association

Tip Reporting Basics

The National Restaurant Association's
Tip Reporting
Education Kit
has tools to help everyone in the restaurant — from managers to servers — understand tip reporting.

What you need to know if you EARN tips ...

1. 100% is the magic number: All tips are taxable.
If you earn tips, be aware that if you receive more than $20 in a month in tips, ALL these tips count as income that you must report and pay taxes on. That includes your cash tips, your charge-card tips, and any tips you get from other employees, minus what you tip out to others.

You may have heard all you need to do is report tips equal to 8% of sales, or 10%, or just your charge-card tips. That's a big misconception, and could get you in legal trouble if you earn more. The law requires you to report and pay taxes on 100% of the tips you keep after tip-outs. See the "8% myth".

2. You must record your tips daily.
If you get audited, there's only one thing that'll save you: good daily records. The IRS requires tipped employees to keep a daily tip diary or other evidence to prove tip earnings. Your daily records must show how much you made in cash tips and charge-card tips; the amount of tips you received from other employees through tip pools or other tip-sharing arrangements; and the amount tipped out to other employees.

While you're not required to use the IRS's forms to keep track of your tips, the IRS offers Form 4070A, Employee's Daily Record of Tips, that you can use as your personal tip diary. Call the IRS at (800) TAX-FORM or see our Tip-Reporting Tools and Resources for links to the IRS.

3. You must report your tips to your employer.
Anyone who receives $20 or more in tips in a month must report all tips to their employer by no later than the 10th day of the following month. (Employers may require employees to report tips more often, like every week or at the end of every shift.)

This requirement applies both to directly-tipped employees, such as servers who get tips directly from customers, as well as to indirectly-tipped employees, such as busers, who may share in these tips. An employee's written tip report must include certain information: Check out IRS Form 4070, Employee's Report of Tips to Employer, for details. (Link is available in Tip-Reporting Tools and Resources.)

4. Not reporting your tips is a big deal.
If the IRS audits you and finds out you didn't report all your tips, you could be facing some big bills. Falsifying tip income is illegal. You'll owe income and FICA (Social Security and Medicare) taxes on the unreported tips. You'll probably be stuck with interest and penalties. What's more, the IRS has the right to audit at least as far back as three years -- or further, if the agency believes it's a case of fraud. Some restaurant servers have even been jailed for tax evasion.

More tip reporting resources

Last updated February 2002