How to Report Tip Income on Your Taxes

Who can resist a good doughnut covered in sugar or filled with cream? Certainly not the American troops in WWI who received the treats from Doughnut Lassies – brave ladies who served them on the front lines and became the inspiration for National Doughnut Day celebrated each June.

Luckily, you don’t have to dodge bullets to serve your customers – just the occasional bad tipper. As a food and beverage worker – baker, bartender, waiter/waitress, maître d, hostess, dining room captain, or wine steward – you provide personal service, which could mean tips from satisfied customers, in addition to your regular pay.

Keeping track of your tips for taxes

Tracking your tips is a must. You should use Form 4070A to keep a daily log of what you receive.

How do I claim tip income on my taxes?

All tips, including cash, charged tips, your share of a tip pool, and non-cash items like tickets and passes, are considered income and are subject to income, Social Security, and Medicare taxes. On your tax return, you must report all tips as income.

If you earn more than $20 in cash and noncash tips each month, you must report all of your tips to your employer for the month. Your employer generally tracks all your charged tips, but you should include them in your daily tip log to be sure all your tips are reported. Provide your employer with a copy of your daily tip log and verify both your records and their records are complete.

Tips totaling less than $20 per month do not need to be reported to your employer, but must be included in your wages on your tax return. These tips are not subject to Social Security or Medicare taxes. The tips you report, along with your regular wages, are included on your W-2, in Box 1.

If the business you are working for has been audited by the IRS, and it is determined that the tip income for the establishment was underreported by your employer, you may have allocated tips shown on your W-2, Box 8. If you have allocated tips on your W-2 and don’t have daily tip records showing you reported all your tips, you are subject to income, Medicare, and Social Security taxes on the allocated tips. Use IRS Form 4137, Social Security and Medicare Tax on Unreported Tip Income, to calculate your additional taxes on your return. You must also include the allocated tips from your W-2, Box 8 in your total income on Form 1040.  Check with your Tax Pro to see if you are eligible for the special allocated tip rules.

Reporting tips for the self-employed

If you are self-employed, tips must be included in the gross income for your business. The tax reform law passed in 2017 removed the deduction for job-related expenses for employees, but you can still deduct your business expenses if you are self-employed.

So whether you work at a small eatery or an upscale dining spot, continue to provide service with a smile. Happy customers can also be the most generous tippers.