This chapter is for employees who receive tips.

All tips you receive are income and are subject to federal income tax. You must include in gross income all tips you receive directly, charged tips paid to you by your employer, and your share of any tips you receive under a tip-splitting or tip-pooling arrangement.

The value of noncash tips, such as tickets, passes, or other items of value, are also income and subject to tax.

Reporting your tip income correctly is not difficult. You must do three things.

1. Keep a daily tip record.
2. Report tips to your employer.
3. Report all your tips on your income tax return.

 
This chapter will explain these three things and show you what to do on your tax return if you have not done the first two. This chapter will also show you how to treat allocated tips.

For information on special tip programs and agreements, see Publication 531.

You must keep a daily tip record so you can:

• Report your tips accurately to your employer,
• Report your tips accurately on your tax return, and
• Prove your tip income if your return is ever questioned.

There are two ways to keep a daily tip record. You can either:

• Write information about your tips in a tip diary, or
• Keep copies of documents that show your tips, such as restaurant bills and credit or debit card charge slips.

You should keep your daily tip record with your tax or other personal records. You must keep your records for as long as they are important for administration of the federal tax law. For information on how long to keep records, see Publication 552, Recordkeeping for Individuals.

If you keep a tip diary, you can use Form 4070A, Employee's Daily Record of Tips. To get Form 4070A, ask the Internal Revenue Service (IRS) or your employer for Publication 1244. Publication 1244 includes a 1-year supply of Form 4070A. Each day, write in the information asked for on the form.

In addition to the information asked for on Form 4070A, you also need to keep a record of the date and value of any noncash tips you get, such as tickets, passes, or other items of value. Although you do not report these tips to your employer, you must report them on your tax return.

If you do not use Form 4070A, start your records by writing your name, your employer's name, and the name of the business (if it is different from your employer's name). Then, each workday, write the date and the following information.

• Cash tips you get directly from customers or from other employees.
• Tips from credit and debit card charge customers that your employer pays you.
• The value of any noncash tips you get, such as tickets, passes, or other items of value.
• The amount of tips you paid out to other employees through tip pools or tip splitting, or other arrangements, and the names of the employees to whom you paid the tips.

You can use an electronic system provided by your employer to record your daily tips. If you do, you must receive and keep a paper copy of this record.

Do not write in your tip diary the amount of any mandatory service charge that your employer adds to a customer's bill and then pays to you and treats as wages. This is part of your wages, not a tip. See examples below.

Good Food Restaurant adds an 18% charge to the bill for parties of 6 or more customers. Jane’s bill for food and beverages for her party of 8 includes an amount on the tip line equal to 18% of the charges for food and beverages, and the total includes this amount. Since Jane did not have an unrestricted right to determine the amount of the tip, the 18% charge is considered a mandatory service charge. Do not include the 18% charge in your tip diary. Mandatory service charges that are paid to you are considered wages, not tips.

Good Food Restaurant also includes sample calculations of tip amounts at the bottom of its bills for food and beverages provided to customers. David’s bill includes a blank "tip line," with sample tip calculations of 15%, 18%, and 20% of his charges for food and beverages at the bottom of the bill beneath the signature line. Since David was free to enter any amount on the "tip line" or leave it blank, any amount he includes is considered a tip. Be sure to include this amount in your tip diary.