You need to report your tips to your employer in order to ensure that all your employee compensation, including your tip income, is subject to social security and Medicare tax. This will affect your income if you ever become disabled, and will also increase your social security benefits when you retire. The tips you need to report, for this purpose, include cash, checks, and tips from debit and credit cards. You do not need to report items of value you receive as tips, such as tickets, to your employer. These types of tips are not subject to social security and Medicare tax. But you should still include these items on your tip record, since they are subject to income tax.
You should report tips to your employer whenever you receive over $20 in any given month. If you receive less than that amount, you do not need to report them. If you work for more than one employer, the $20 limit applies to each employer.
IRS Form 4070
Your employer may give you a specific form to use for reporting your tips. Your employer may also ask you to report your tips more often than once a month, and may ask you to report them electronically. But you must report tips at least monthly (provided you have more than $20 to report). If your employer does not give you a form to use for reporting tips, you can use IRS Form 4070 – “Employee’s Report of Tips to Employer”. This form is also included in IRS Publication 1244. You should give this form to your employer by the 10th of the following month, and should keep a copy for your records.
Penalty for Not Reporting Tips
If you do not report your tips to your employer, you could be subject to a penalty of 50% of the social security and Medicare tax that applies on the unreported tips. This penalty is in addition to the taxes you would owe on the tips.
Giving Your Employer Money to Cover the Tax on Your Tips
It may turn out that the amount of tax your employer withholds from your pay is not sufficient to cover the social security and Medicare tax that applies on your regular pay plus the tips you report. If this is the case, you can give your employer money to cover the difference. If any social security and Medicare taxes remain unpaid at the end of the year, you will have to report them on your income tax return. These uncollected taxes will be shown in box 12 of your Form W-2 for the year.