Do I Have to Claim Tips on My Tax Return?

A waitress earning a tip at work

As a server, bartender, or waitress, you might earn most of your income from tips. People can leave tips in many ways, including cash. It is tempting to leave this amount out of your calculation when figuring your gross income. But the IRS wants to know all your income, including tips. 

What should be included as tip income for my taxes? 

Tips are usually paid through credit/debit card or with cash.  

However, there are other ways to receive a tip. Sometimes people who know you well will leave other perks as their tip. These can include: 

  • Tickets to a game or event  
  • Vouchers or coupons 
  • Other noncash items 

 You do not have to report these as income to your boss, but you are still responsible for reporting the fair market value to the IRS. 

If your restaurant includes service charges for large parties, you are not required to report it to your employer because it is accounted for and should be included in your wages. But if the customer leaves you an additional tip on top of the service charge, you will need to report that 

What about shared or pooled tips? 

If you receive a pooled tip or share your tips with your team, you are only responsible for reporting what you actually bring home. For example, if you make $150 for one table but give $40 to the bartender and $20 to the busboy, you only need to report $90 in tips. Similarly, if you are the recipient of a shared tip, only report your portion. 

Do I have to report my tips? 

The IRS assumes that if you work in a restaurant or similar industry, you will earn tips at an average of 8%. If you regularly report tips under this amount or don’t report any tips, the IRS will be suspicious. For this reason, it is important to report your tips.  

Should I report my tips to my boss or straight to the IRS? 

If you make more than $20 in tips per month, report them directly to your employer. This will allow your boss to keep track of expenses and sales, and also help them to correct your tax withholdings. 

If you make less than $20 in tips per month, it will not impact your tax bill the same way. You can report these directly to the IRS. 

Are taxes withheld from my tip income? 

It is also important for you to report to your employer because if you only report your tips on your tax return, your withholdings from your hourly wages won’t cover the tax from the tips. If you report them to your employer, this will be accounted for monthly, and they can withhold the right amount of tax over time so your tax bill in April is not as big. 

How do I report tips to my employer? 

Use Form 4070A to record your tips. Then report them to your employer by the 10th of the month after you made them using Form 4070.  

How do I report tips to the IRS? 

If you make less than $20 in tips in a month, report them directly to the IRS using Form 4137.  

If you work more than one job, apply the $20 limit to each.  

All tips should be included in your taxable income, regardless of who you report them to. 

What is the penalty for not reporting tips?  

If you fail to report your tips, the IRS can fine you as much as 50% of the tax (Medicare and Social Security) you were supposed to pay on that amount. 

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