IRS Informs Taxpayers that Tip Income is Taxable and Must be Reported, FS-2022-37

The IRS has informed taxpayers who work in restaurants, salons, hotels and similar industries that tips can be taxable income. There are four factors determine whether a payment qualifies as a tip. The customer should make the payment free from compulsion, the customer must have the unrestricted right to determine the amount, the payment should not be the subject of negotiations or dictated by employer policy and generally, the customer should have the right to determine who receives the payment.

Further, employees must keep a daily record of the cash tips they receive. They can use Form 4070A, Employee’s Daily Record of Tips, to keep daily track of the cash tips they receive. To report tips to employer, there is no required form, but the statement must include employee signature, employee’s name, address and social security number, employer’s name and address, month or period the report covers and the total of tips received during the month or period.

Additionally, tips reported to the employer by the employee should be included on the employee’s Form W-2, Wage and Tax Statement, for reporting on an individual tax return. Finally, employers with tipped employees are required to keep employee tip reports, withhold taxes, pay the employer share of Social Security and Medicare taxes, report this information to the IRS on Form 941, Employer’s Quarterly Federal Tax Return and deposit the withheld taxes in accordance with federal tax deposit requirements.