If you receive tips, you should keep a daily record of them and report them to your employer in order to obtain your social security and Medicare coverage and to avoid a penalty. You must also report all your tip income on your income tax return.
The tips you receive from customers in your work as an employee are considered "employee compensation" and are subject to U.S. income tax. This includes cash tips you receive directly from customers, tips that are included on credit card payments that are paid to you by your employer, and your share of allocated tips. If you receive any items of value other than cash, such as tickets or passes, these are also subject to income tax, but not to social security and Medicare tax.
Keeping Track of Your Tips
You should keep track of your tips on a daily basis, using a diary or other record of your own. If you use your own record, it should show your name, your employer’s name, and the name of the business, if it is not the same as your employer’s name. Then for each date you should record the cash tips you receive directly from customers or that you receive from other employees, tips from credit cards that your employer pays you, items of value other than cash that you receive as tips, and the amount of tips you pay other employees and their names. Service charges that your employer adds to customers’ bills and then pays to you are not tips. They are reported as wages, and therefore should not be included in your record of tips.
IRS Form 4070A
You can also use a form provided by the Internal Revenue Service (IRS) – Form 4070A, called “Employee’s Daily Record of Tips”. Your employer may have this form, or you can obtain it from IRS Publication 1244 – “Employee’s Daily Record of Tips and Report to Employer”. This publication can be downloaded from the IRS website. The publication is also available in Spanish – 1244(PR). The form is designed to record the information described above.