IRS Form 4070: How are tips reported on the tax return?
Tips are considered taxable income, and individuals are required to report them on their federal income tax return or suffer penalties.
For workers that receive tips in their job, the Internal Revenue Service (IRS) provides the Form 4070: Employee’s Report of Tips to Employer. This is given to the employer for the purpose of withholding federal income, Social Security and Medicare taxes.
Failure to declare tips, including those earned in cash directly from customers, from a tip-sharing program and those received through credit or debit cards, can result in financial penalties.
Employers must send employees a W-2 form which documents the wages they paid the worker by the end of January. On that form, along with the wages that were earned will be included the tips reported to the employer and the amount of taxes paid. Those amounts will be used when filing out your tax declaration.
How are tips reported?
Everyday that a tipped employee works, they must keep track of the tips that they receive. They can do this using the IRS Form 4070-A, Employee’s Daily Record of Tips.
Using IRS Form 4070, workers can report their tips received each calendar month. They need to report them to their employer by the 10th day of the month following the month that you receive them. Should that day fall on a Saturday, Sunday, or legal holiday you must report your tips by the next day that is not any one of those days.
Workers are not required to report tips to their employer if they do not receive at least $20 during the calendar month working for that employer. However, on the contrary, failure to properly report tips can result in a 50% penalty of the Social Security and Medicare as well as Railroad Retirement tax that are due on the unreported tips. An exception will be made if there was reasonable cause for not reporting the tips.
When the employer is reporting tips to the IRS, the total income from tips must be at least 8% of your total receipts for that time period. However, not all receipt are included, those for carry-out sales and sales that include a service charge of at least 10% are not counted.