Publication 3148 (Rev. 12-2021)

Publication 3148 (Rev. 12-2021) Catalog Number 26307C Department of the Treasury Internal Revenue Service www.irs.gov

A Guide to Tip Income Reporting

for Employees Who Receive Tip Income

If you work and receive tips,

this guide is for you.

The tip income you receive as an employee from the services whether cash or included in

a charge — is taxable income. As taxable income, these tips are subject to federal income

tax, social security and Medicare taxes, and may be subject to state income tax as well. The

Internal Revenue Service (IRS) has prepared this guide to aid the employee who may need

answers to tip income reporting questions.

What tips do I have to report?

Do I have to report

all

my tips to my boss?

If you received $ 20.00 or more in tips in any one month, you

should report all your tips to your employer so that federal

income tax, social security and Medicare taxes, and maybe

state income tax can be withheld.

Do I have to report

all

my tips on my tax

return?

Yes. All tips are taxable income and should be reported on your

tax return.

I was told that I had to report only a

certain percentage of my total sales as

tips. Is this true?

No. You must report to your employer all (100%) tips you

receive, except for the tips from any month that do not total at

least $20.00.

Sometimes I don’t get tips directly from

customers, but rather from another

employee. Do I need to report those tips?

Yes. Employees who receive tips from another employee are

required to report “tip-outs.” Employees often disburse tips out

of their earned tips to another employee. Remember, all tips are

taxable income.

Do I have to report tip-outs that I pay to

other employees?

No. You report to your employer only the amount of tips you

retain. However, you must maintain records of tip-outs with

your other tip income (cash tips, charged tips, split tips, tip

pool).

What records do I need to keep?

What type of records do I have to keep?

You must keep a running daily log of all your tip income. You

can use Publication 1244, Employee’s Daily Record of Tips and

Report to Employer, to record your tip income for one year.

Publication 1244 includes Form 4070, Employee’s Report of

Tips to Employer, and Form 4070A, Employee’s Daily Record of

Tips. These forms have spacing for you to log your name, the

employer’s name and address, date tips were received, date of

entry, cash and charge tips received, tips paid out, and name

of employee paid. Your daily log would be your best proof

should your income tax return be questioned. For a free copy

of Publication 1244, call the IRS at 1-800-829-3676.

What can happen if I do not keep a

record of my tips?

If it is determined in an examination that you underreported

your tip income, the IRS will assess the taxes you owe based

on the best available records of your employer. Tip income

adds up. Underreporting could result in you owing substantial

Federal Income, Social Security and Medicare penalties, and

interest.

If I report all my tips to my employer, do I

still have to keep records?

Yes. You should keep a daily log of your tips so that in case of

an examination, you can substantiate the actual amount of tips

received. There are a number of reasons why you might need

records:

n Your return could be randomly selected for a federal income tax

examination.

For example: Your Form 1040, U.S. Individual Income Tax Return,

establishes that you have your own home, two cars, and three

exemptions, and your Form W-2 shows that you earned only $10,000

in income. In this scenario, an examination may occur if the examiner

determines that income may have been underreported.

n A tip examiner could review your employer’s books and records.

The examination could reveal unreported tip income that you

may later need to verify.

n An Internal Revenue Service Center may run a match of your in-

come information from your Form 1040, U.S. Individual Income

Tax Return, with the income information from your Form W-2. If

these ﬁgures do not match, you could receive a notice about the

discrepancy and a possible examination of your tax return.

How does this affect my income

tax ﬁling?

I forgot to report my tip income to my

employer, but I remembered to record it

on my federal income tax return. Will that

present a problem?

If you do not report your tip income to your employer, but you

do record the tip income on your federal income tax return, you

may owe a 50% social security and Medicare tax penalty and

be subject to a negligence penalty and possibly an estimated

tax penalty. When you do not report your tips to your employer,

it places your employer at risk of possible assessment of the

employer’s share of social security and Medicare taxes.

If I report all my tips but my taxes on the

tips are greater than my pay from my

employer, how do I pay the remaining

taxes?

You can either pay the tax when you ﬁle your federal income

tax return or you can reach into your tip money and give some

to your employer to be applied to those under-withheld taxes.

Employer will then record these taxes and you will get credit on

your Form W-2. If you wait to pay when you ﬁle your tax return,

you may be subject to an estimated tax penalty.

What can happen if I don’t report my tips

to the IRS?

If the IRS determines through an examination that you

underreported your tips, you could be subject to additional

federal income tax, social security and Medicare taxes, and

maybe state income tax. Also, a penalty of 50% of the additional

social security and Medicare taxes, and a negligence penalty of

20% of the additional income tax, plus interest, may apply.

What’s in it for me if I report all my tip

income?

There are many good reasons why you want to report all

your tip income:

n Increased income may improve ﬁnancing approval when apply-

ing for larger loan amounts (mortgage, car, and other loans)

n Increased worker’s compensation beneﬁts, should you get hurt

on the job

n Increased unemployment compensation beneﬁts

n Increased social security and Medicare beneﬁts (the more you

pay, the greater your beneﬁts)

n Increased employee pension, annuity, or 401(k) participation

n Check with your employer for other increased beneﬁts (based

on pay) that your company may offer, such as life insurance,

disability payments, and the right to purchase stock options

n Compliance with the tax law

Is tip reporting unique to a

speciﬁc industry?

Does tip income reporting apply only to

employees in a speciﬁc industry?

No. Anyone who receives tip income is required by law to report

it to his or her employer. The Tip Rate Determination/Education

Program (TRD/EP) was ﬁrst promoted in the gaming industry

(casino industry) in Las Vegas, Nevada, and subsequently

to the food and beverage industry. Other individuals that

receive tip income include airport skycaps, bartenders, hair

stylists, bellhops, casino workers, delivery service people, golf

caddies, hotel housekeepers, manicurists, masseuses, parking

attendants, railroad redcaps, and taxi drivers.

Why should I report my tips to my

employer?

When you report your tip income to your employer, the employer

is required to withhold federal income taxes, social security and

Medicare taxes, and maybe state income tax.

Tip reporting may increase your social security credits resulting

in greater social security and Medicare beneﬁts when you retire.

Tip reporting may also increase other beneﬁts to which you

may become entitled, such as unemployment beneﬁts, worker’s

compensation, or retirement beneﬁts. Additionally, a greater

income may improve ﬁnancing approval for mortgage, car, and

other loans.

Why has tip reporting become such an

issue?

To report all tip income has always been the law. The IRS has

put greater emphasis on reporting tip income over the past

few years because a signiﬁcant number of taxpayers are not

reporting all their tip earnings as taxable income.

What is this compliance program

I’ve heard about?

My employer has entered into a

compliance agreement with the IRS

concerning tips. What is this?

The Tip Rate Determination/Education Program was developed

in 1993 to help those employees receiving tip income and their

employers understand the laws on reporting tip income. Under

this program, and depending on your speciﬁc business, your

employer may enter into one of three arrangements — the

Tip Rate Determination Agreement (TRDA), the Tip Reporting

Alternative Commitment (TRAC), or Gaming Industry Tip

Compliance Agreement (GITCA). Ask your employer for more

information about this program.

TRDA–What is my responsibility,

as an employee, under the Tip Rate

Determination Agreement?

You are required to ﬁle your federal tax returns. You may be

asked to sign a Tipped Employee Participation Agreement

proclaiming you are participating in the program. The employer,

as a participant in the TRDA, has agreed with the IRS to a tip

rate for the employer’s establishment. To stay a participating

employee, you must report tips at or above the tip rate

determined by the agreement. Furthermore, as part of the

TRDA arrangement, the employer is required to report your

name, social security number, the hours worked or sales made,

your job classiﬁcation shift, and your reported tips to the IRS if

you do not participate in the program.

GITCA-What is my responsibility, as an

employee, under the Gaming Industry Tip

Compliance Agreement?

You are required to ﬁle your federal tax returns. You may

be asked to sign a Model Gaming Employee Tip Reporting

Agreement proclaiming you are participating in the program.

The employer, as a participant in the GITCA, has agreed with

the IRS to a tip rate for the employer’s establishment. To stay

a participating employee, you must report tips at or above the

tip rate determined by the agreement. Furthermore, as part of

the GITCA arrangement, the employer is required to report your

name, social security number, the hours worked or sales made,

your job classiﬁcation, venue, shift and your reported tips to

the IRS if you do participate in the program.

TRAC–What is my responsibility, as

an employee, under the Tip Reporting

Alternative Commitment?

Directly-tipped employee:

n Your employer will furnish you with a written statement (at least

monthly) reﬂecting your charged tips

n You are to verify or correct this statement

n You are to indicate the amount of cash tips received

n When reporting your cash tips, you should remember that there

is a correlation between charged tips and cash tips.

(Your employer may be able to inform you of the establishment’s

charged sales to cash sales ratio. For example, if the establishment is

50% charge and 50% cash, and you received and reported $100 in

tips on charged receipts, it is reasonable to believe that you should be

reporting close to $100 in cash tips.)

n You may be asked to provide the name and amount of any tip-

outs to indirectly-tipped employees. Does tip income reporting

apply only to employees in a speciﬁc industry?

Indirectly-tipped employee:

n You are required to report all your tips to your employer. If the

establishment has the directly-tipped employee provide the

name and amount of tips shared with you, the establishment

could provide you with a statement of tips that you would need

to verify or correct.

The IRS provides the following publications and forms

relating to tip income reporting. These products can be

downloaded from the IRS Web site at www.irs.ustreas.gov

and ordered through the IRS by dialing 1-800-829-3676.

(TTY/TDD equipment access, dial 1-800-829-4059)

Pub 505 – Tax Withholding and Estimated Tax

Pub 531– Reporting Tip Income

Pub 1244 – Employee’s Daily Record of Tips and Report to Employer. This publication

includes Form 4070, Employee’s Report of Tips to Employer, and Form 4070A,

Employee’s Daily Record of Tips.

Form 1040ES – Estimated Tax for Individuals

Form 4137 – Social Security and Medicare Tax on Unreported Tip Income

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