Get Publication 1872 (Rev. 05-1999). Tips On Tips - A Guide To Tip Income Reporting For Employees In

Employees can use Form 4070A, Employee's Daily Record of Tips to keep a daily record of their tips, and Form 4070, Employee's Report of Tips to Employer to report their tips to you.

If you fail to report your tips to your employer, the IRS can impose a penalty equal to 50% of the Social Security and Medicare tax you fail to pay. And, if you didn't earn enough in wages and tips that your employer pays to you directly to cover your tax withholding, your W-2 will show how much tax you still owe.

In addition, employers are required to pay the employer share of social security and Medicare taxes based on the total wages paid to tipped employees as well as the reported tip income. This information and tax are finally reported to the IRS on the appropriate forms by the employer.

Tips reported to the employer by the employee must be included in Box 1 (Wages, tips, other compensation), Box 5 (Medicare wages and tips), and Box 7 (social security tips) of the employee's Form W-2.

You must report tips you received (including both cash and noncash tips) on your income tax return. Any tips you reported to your employer are included in the wages shown in box 1 of your Form W-2, Wage and Tax Statement. Add to the amount in box 1 only the tips you didn't report to your employer as required.

If you didn't report tips to your employer as required, you may be charged a penalty equal to 50% of the social security, Medicare, and Additional Medicare Taxes due on those tips.

Penalty for not reporting tips. If you don't report tips to your employer as required, you may be subject to a penalty equal to 50% of the social security, Medicare, Additional Medicare, or railroad retirement taxes you owe on the unreported tips.

Tips are taxable income, and a failure to properly report your tip income could lead to the following issues: IRS audit of your return. Back taxes owed. Interest and penalties added to your tax debt.