Cecily Zamora
Waitresses and other tipped workers in the restaurant industry have historically been required to report their tips as taxable income. Tips are considered taxable income by the Internal Revenue Service (IRS), and employees are required to keep a record of their tips and report them to their employer. Employers are also responsible for collecting taxes on tips, filing certain forms, and paying or depositing taxes. However, in 2024, the No Tax on Tips Act was introduced in Congress, which, if passed, would exclude tipped income from federal income taxes. This change would be effective from 2026 to 2028 and would impact not only waitresses but also other tipped workers in the restaurant and hospitality industries.
| Characteristics | Values |
|---|---|
| Definition of a tip | A noncompulsory, additional payment for services where the customer is free to set the amount |
| Who receives tips? | Employees in restaurants, salons, hotels, casinos, ride-sharing services, valet parking, and nail salons |
| Taxation | Tips are taxable income and must be reported to the employer and the IRS |
| Tax evasion | Cash tips sometimes go unreported, which is considered tax evasion |
| Record-keeping | Employees must keep a daily record of tips received |
| Forms | Form 4070A, Form 4137, Form 1040, Form 1040-SR, Form 941, Form W-2, and Form 8974 |
| Tip pooling | Some restaurants require tip pooling, where tips are shared with bussers, bartenders, and other staff members |
| No Tax on Tips Act | A bill introduced in 2024 that would exclude tipped income from federal income taxes |
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What You'll Learn
Waitress tips are taxable income
Waitresses, along with other tipped employees such as waiters, bartenders, and hairstylists, are required to report their tips as income and pay taxes on them. This is because, according to the Internal Revenue Service (IRS), all cash and non-cash tips received by an employee are considered income and are subject to federal income taxes. Cash tips refer to those received directly from customers, electronically paid and distributed by the employer, or received from other employees under a tip-sharing arrangement. Non-cash tips include items of value such as tickets, passes, or other goods. While non-cash tips do not need to be reported to the employer, they must be reported on the individual's tax return.
Employees must keep a daily record of their cash tips, which can be done using Form 4070A, included in Publication 1244. This form also includes space for recording the date and value of any non-cash tips. Reported tips are included on the employee's Form W-2, Wage and Tax Statement, while any unreported tips must be declared separately on Form 4137, which is then included as additional wages on their tax return. Additionally, employees must pay the employee share of Social Security and Medicare taxes owed on their tips. Employers are also responsible for paying the employer share of these taxes based on total wages and reported tip income, which is reported on Form 941.
It is important to note that, in certain situations, a tip may not be considered taxable income. For example, in California, a tip, gratuity, or service charge is considered optional and not included in taxable gross receipts when the restaurant check is presented with a blank "tip" area or with tip suggestions but a blank amount. Additionally, some states have laws that differ from the federal Fair Labor Standards Act (FLSA), and employers must comply with the standard most protective of employees. For instance, some states may prohibit employers from taking a tip credit or require a higher cash wage than the federal direct wage of $2.13 per hour.
While the majority of tipped workers are currently taxed on their income, there have been recent developments with the proposed "No Tax on Tips Act." This bill, introduced in Congress in June 2024, aims to exclude tipped income from federal income taxes, providing tax relief to tipped workers. However, tax experts argue that it would only benefit a small percentage of workers, as many tipped workers already do not have to pay federal income taxes due to deductions and credits. As of June 20, 2024, the bill was referred to the Committee on Finance, and for the foreseeable future, tips will continue to be taxed.
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Cash and non-cash tips
Cash tips include those received directly from customers, electronically paid tips distributed to the employee by their employer, and tips received from other employees under any tip-sharing arrangement. All cash tips must be reported to the employer. Employees must keep a daily record of the cash tips they receive. They can use Form 4070A, included in Publication 1244, to keep a daily track of the cash tips they receive.
Noncash tips are those of value received in any other medium than cash, such as tickets, passes, or other goods or commodities that a customer gives to the employee. Noncash tips are not reported to the employer, but employees must report them on their tax return. Employees must keep a record of the date and value of any noncash tips.
A compulsory charge for service, for example, a set percentage of the bill, is not considered a tip under the Fair Labor Standards Act (FLSA). Under the FLSA, employers cannot keep any portion of employees' tips, even if the employee is earning at least the federal minimum wage. The FLSA also prohibits employers from reducing the amount of tips paid to employees by any amount greater than the transactional fee charged by the credit card company.
In June 2024, the "No Tax on Tips Act" was introduced in Congress. If passed, the bill would exclude tipped income from federal income taxes.
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Record-keeping and reporting
Employee Record-Keeping and Reporting:
Employees who receive tips must keep a daily record of their cash and non-cash tips. They can use Form 4070A, Employee's Daily Record of Tips, to document the date and value of each cash tip received. Noncash tips, such as tickets, passes, or other items of value, should also be recorded with their date and value. While non-cash tips do not need to be reported to employers, they must be reported on the employee's tax return.
Employees must report all cash tips of $20 or more received in a calendar month to their employer by the 10th day of the following month. This can be done through a written statement or by using Form 4070. If employees receive less than $20 in tips during a month, they are not required to report this to their employer but must include this amount as income on their tax returns.
Employer Record-Keeping and Reporting:
Employers are responsible for maintaining accurate records of employee tip income and ensuring compliance with labour and tax laws. Computerized Point of Sale (POS) systems can assist in tracking sales, credit card tips, and designated tip outs, making record-keeping easier.
For employees who receive tip income, employers must keep records of their names, addresses, Social Security numbers, payment amounts and dates, and the corresponding income, Social Security, and Medicare taxes collected. Employers must also report allocated tips separately in Box 8 of the employee's Form W-2, Wage and Tax Statement.
If operating a large food or beverage establishment, employers must file Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips. This form is due by the last day of February of the following year (or March 31 if filing electronically).
Additional Considerations:
It is important to note that service charges added to bills or fixed by the employer are not considered tips but are instead treated as wages. Employers must also ensure that they do not keep any portion of employees' tips and comply with any applicable state laws that may differ from federal regulations, adopting the standards most protective of employees.
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Social Security and Medicare taxes
In the United States, all cash and non-cash tips received by an employee are considered income and are subject to federal income taxes. Cash tips received by an employee in any calendar month are subject to Social Security and Medicare taxes and must be reported to the employer. If the total tips received by the employee during a single calendar month by a single employer are less than $20, then these tips are not required to be reported and taxes are not withheld.
Employees must report tips to their employer by the 10th of the month after the month the tips are received. For example, tips received by an employee in August must be reported by the 10th of September. If the 10th falls on a Saturday, Sunday, or legal holiday, the employee may submit the report to the employer by the next day that is not a Saturday, Sunday, or legal holiday.
Employers are responsible for withholding the 0.9% Additional Medicare tax on an individual's wages paid in excess of $200,000 in a calendar year, without regard to filing status. Employers must also include wages, tips, and other compensation in the box labelled "Wages, tips, other compensation" on Form W-2. Include Medicare wages and tips, and Social Security tips in their respective boxes.
Employees must use Form 4137, Social Security and Medicare Tax on Unreported Tip Income, to report the amount of any unreported tip income to include as additional wages on their Form 1040, U.S. Individual Income Tax Return, or Form 1040-SR, U.S. Tax Return for Seniors, and the employee share of Social Security and Medicare tax owed on those tips.
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The 'No Tax on Tips Act'
In the United States, tips are considered taxable income and must be reported to the Internal Revenue Service (IRS). This includes cash and non-cash tips received by employees in industries such as restaurants, salons, and hotels. While cash tips are reported to the employer, non-cash tips, such as tickets or passes, are not reported to the employer but must be included on the employee's tax return. Employees are responsible for keeping daily records of their cash tips and reporting them to their employer, who will then include this information on the employee's Form W-2 for tax filing.
To address the taxation of tips, the "No Tax on Tips Act" was introduced in the 119th Congress (2025-2026). The bill aims to amend the Internal Revenue Code of 1986 to eliminate the income tax on qualified tips through a deduction allowed to all individual taxpayers. This means that employees would no longer have to pay taxes on tips received, providing relief to workers in industries where tipping is customary.
The "No Tax on Tips Act" is designed to benefit employees who regularly receive tips, such as waiters, waitresses, bartenders, and hairstylists. By eliminating the tax burden on tips, employees can keep a larger portion of their earnings. Additionally, the Act provides for a deduction for qualified tips, allowing taxpayers to reduce their taxable income. This deduction is available to both itemizing and non-itemizing taxpayers, with a maximum annual deduction of $25,000 for employees and a limit based on net income for self-employed individuals.
Furthermore, the Act requires the Secretary of the Treasury to publish a list of occupations that traditionally and customarily receive tips. This list will provide clarity on which professions are eligible for the tax deduction. Additionally, the Act extends a credit for a portion of employer social security taxes paid with respect to employee tips in beauty service establishments, demonstrating a comprehensive approach to supporting service industry workers.
Overall, the "No Tax on Tips Act" aims to alleviate the tax burden on tipped employees, ensuring that they can retain more of their income. By providing tax relief and simplifying reporting requirements, the Act seeks to benefit both employees and employers in industries where tipping is prevalent. This legislation reflects a recognition of the unique challenges faced by service industry workers and represents a step towards a more equitable tax system.
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Frequently asked questions
Yes, tips are considered taxable income.
Yes, you must report all tips over $20 to your employer by the 10th of the month after you receive them.
Non-cash tips, such as tickets or passes, must be reported on your tax return but do not need to be reported to your employer.
Failing to report tips is considered tax evasion and can result in penalties from the IRS.
The 'No Tax on Tips' Act is a bill introduced in 2024 that would exclude tipped income from federal income taxes. However, it has not yet been passed.
