Check us out on BrokerCheck           

Restaurant Payroll: Tips on Reporting Tips

September 9, 2019 | posted by Abacus Payroll

If you are like millions of taxpayers in the hospitality and service industries, you may receive tips. The tax code is clear; if you receive tips you must report them as income. Some employers have systems to make this easy, while others do not.

It is important to stay organized and keep proper recordkeeping of your earned tips throughout the year. Following are some suggestions:


Think 1-2-3

Proper tip reporting has three components:

  1. Keeping a daily tip record
  2. Reporting your tips to your employer
  3. Recording your tips on your income tax return


Recording Tip Activity

Per the IRS, you can keep your tips by either maintaining a tip diary or by saving documents that show your tips. If your employer does not provide you with an electronic form of a tip diary, you can always create your own. The IRS has one for your use in Form 4070A.


Reporting Tips to an Employer

You should record daily activity in your diary, and then provide a monthly summary to your employer by the 10th of the following month. The report should include the following elements:

  • Your name and address
  • Your Social Security Number
  • Employer name and address
  • Time period
  • Date submitted to employer
  • Your signature
  • Tip Information:
    • Cash tips received,
    • Credit/Debit tips received,
    • Tips paid out to fellow workers,
    • Net tips received


Paying Taxes

With proper tracking and reporting of tip activity to your employer, filing your taxes on this income can be done without too much trouble. Here are some ideas:

Use your employer for reporting. With proper reporting, your employer can help ensure taxes are withheld and sent in for you. This can help you avoid a large tax bill at the end of the year.

Giving your employer funds. If your tips are a high portion of your income, your wages may not be sufficient to cover your taxes. To solve this, you can provide some of your tip income to your employer to pay a proper level of withholdings on your behalf.


Other Things to Note

Service charge or tip?

If your employer adds a set tip amount to a bill (18% automatic tip for parties of 6 our more), this is not a tip, it is a service charge and treated as wages.

Shared tips.

Be careful reporting those tips you share with others. Clearly report your own net tip income to your employer. Do not report gross tips that you share with others on your tax return.

Know the penalty.

If you do not report tips to your employer, the potential penalty is 50% of the Social Security and Medicare related taxes you owe on the unreported tips.

Allocated tips.

Sometimes employers pay you tips and report them on your W-2 that are above what you report to them. The good news? You receive additional income above your hourly wages. The bad news? You will owe income taxes AND Social Security and Medicare taxes on these tips.


Keeping track of tip income can be made manageable by developing a good reporting system. Please ask for help if you need assistance before it gets out of hand.

© Business tips are provided by The Alloy Silverstein Group. The business information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance.

About the Author: Abacus Payroll

Abacus Payroll, Inc. is a leading provider of payroll solutions for businesses of all sizes. Whether yours is a family-owned small business or a national corporation, we provide payroll, tax and other financial services on time and at an affordable price. Unlike other payroll providers, Abacus Payroll will assign your very own payroll specialist who will understand your payroll needs inside and out. So no more speaking to a different person each time, no more sitting on hold for hours and most importantly no more missed deadlines! Contact us today to see how we can help your business. You can count on us.