Tip Income Reporting

If your total tips for any 1 month from any one job are less than $20, do not report the tips for that month to that employer.
Report to your employer only cash, check, and debit and credit card tips you receive.
If you participate in a tip-splitting or tip-pooling arrangement, report only the tips you receive and retain. Do not report to your employer any portion of the tips you receive that you pass on to other employees. You must report tips you receive from other employees.
If your employer does not give you any other way to report your tips, you can use Form 4070, Employee's Report of Tips to Employer. Fill in the information asked for on the form, sign and date the form, and give it to your employer.
If you do not use Form 4070, give your employer a statement with Your name, address, and social security number.
Your employer's name, address, and business name (if it is different from your employer's name).
The month (or the dates of any shorter period) in which you received tips.
The total tips required to be reported for that period.
You must sign and date the statement. Be sure to keep a copy with your tax or other personal records.

If you do not report tips to your employer as required, you may be subject to a penalty equal to 50% of the social security and Medicare taxes or railroad retirement tax you owe on the unreported tips.
The penalty amount is in addition to the taxes you owe.
You can avoid this penalty if you can show reasonable cause for not reporting the tips to your employer.
To do so, attach a statement to your return explaining why you did not report them.

If you're total tips for any 1 month from any one job are less than $20, do not report the tips for that month to that employer.
Tips of less than $20 are not reportable to the employer and not subject to FICA tax But are subject to income tax.

If your employer does not give you any other way to report your tips, you can use Form 4070, Employee's Report of Tips to Employer. Fill in the information asked for on the form, sign and date the form, and give it to your employer.
Give your report for each month to your employer by the 10th of the next month. If the 10th falls on a Saturday, Sunday, or legal holiday, give your employer the report by the next day that is not a Saturday, Sunday, or legal holiday.

If you received $20 or more in cash and charge tips in a month from any one job and did not report all of those tips to your employer, you must report the social security and Medicare taxes on the unreported tips as additional tax on your return.
To report these taxes, use Form 4137, Social Security and Medicare Tax on Unreported Tip Income, to figure these taxes.
The unreported tips must be included as Wages on Form 1040, Line 7.

The employer reports the allocated tips in Box 8 of the employee's Form W-2; the allocated tips are not included in Box 1 as taxable wages.
The employee must include the tip amount in Box 8, as wage income on Form 1040, Line 7 and also enter the amount on Form 4137 to determine the employee's share of the FICA tax liability.

Employers who operate large food or beverage establishments must file Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips to report employee tip income.
A large food or beverage establishment is defined as business where all of the following apply:
Food or beverage is provided for consumption on the premises
Tipping is a customary practice
More than 10 employees, who work more than 80 hours, were normally employed on a typical business day during the preceding calendar year.
A worksheet for determining whether a business meets the criteria listed above is included in the Instructions for Form 8027. (http://www.irs.gov/pub/irs-pdf/f8027.pdf).

As an employer, you must ensure that the total tip income reported to you during any pay period is, at a minimum, equal to 8% of your total receipts for that period.
In calculating 8% of total receipts, you do not include nonallocable receipts. Nonallocable receipts are defined as receipts for carry out sales and receipts with a service charge added of 10% or more.
When the total reported to you is less than 8%, you must allocate the difference between the actual tip income reported and 8% of gross receipts.
Employers can request a lower rate (but not lower than 2%) for tip allocation purposes by submitting an application to the IRS.
Detailed instructions for computing allocation of tips, reporting allocated tips to employees, and for requesting a lower rate can be found in the Instructions for Form 8027. (http://www.irs.gov/pub/irs-pdf/f8027.pdf).
Speak to your local CPA about the requirements of Tip Income reporting.

If as the Employer, your total reported tips are less than 8% of total food and beverage sales, then you must allocate additional tip income to the W2 of every tipped employee that reported less than 8% of their respective sales, so that their total reported income reflects this minimum 8% allocation.
There are 3 methods of allocating additional employee tips. The gross receipts method, the hours worked method and the good faith agreement.
The Gross Receipts method can be used by any restaurant and usually results in a more accurate and fair allocation.
It determines the amount that each server should have reported in tips to reach the 8% minimum threshold by comparing the server’s gross receipts as a percentage of the total restaurant receipts.
If the server’s actual reported tips are less than the percentage calculated as above then a prorate portion of the total shortfall is allocated to that employees W2.
The Hours Worked method applies only to restaurants which employ fewer than 25 full time employees during a payroll period, and it allocates any tip shortfall (below 8% of total sales) by spreading it among underreporting servers based on their percentage of total hours worked as compared to all the other servers.
This method is the least accurate as it does not take into account the fact that servers work shifts with different tipping patterns.
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The Good Faith Agreement method is rarely used.