Reporting Tip Income - Restaurant Tax Tips
Tips your employees receive from customers are generally subject to withholding. Employees are required to claim all tip income received. This includes tips you paid over to the employee for charge customers and tips the employee received directly from customers.
Employees must report tip income on Form 4070, Employee's Report of Tips to Employer, (PDF) or on a similar statement. This report is due on the 10th day of the month after the month the tips are received. This statement must be signed by the employee and must show the following:
- The employee's name, address, and SSN.
- Your name and address.
- The month or period the report covers.
- The total tips received.
No report is required from an employee for months when tips are less than $20.
Both Forms 4070 and 4070-A, Employee's Daily Record of Tips, (PDF) are included in Publication 1244, Employee's Daily Record of Tips and Report to Employer. (PDF)
Employers must collect income tax, employee social security tax and employee Medicare tax on tips reported by employees. You can collect these taxes from an employee's wages or from other funds he or she makes available.
Allocation of Tips
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. There are three methods for allocating tip income:
- Gross Receipt Method
- Hours Worked Method
- Good Faith Agreement
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. (PDF)
Note: The amount shown as allocated tip income is for information purposes only. You are not required to withhold Income or Social Security taxes on the allocated tip income. The amount of tip income allocated to each employee is shown in box 8 of their Form W-2.
Tip Reporting Requirements for Employers
Employers who operate large food or beverage establishments must file Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips (PDF) 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. (PDF)