Hi, I'm Tim Benningfield, and I work for the IRS.
In today's economy, service employees earn tips in many different occupations such as the traditional restaurant, hotel, and casino employees, along with newer tipped occupations like limo driver, valet parking attendant, and hair and nail stylists.
Are you looking for ways to be sure your employees report their tips accurately?
The first thing an employer should do is to remind their tipped employees that all the tips they receive are taxable income.
The IRS has publications that employers can use to educate their employees about tip reporting.
The publications are available in hard copy, electronically, and even in different languages.
Employees who earn tips should report their tips to their employer at least once a month.
The best way to do this is to use IRS Form 4070, Employee's Report of Tips to Employer or a similar statement, or by an electronic statement provided to the employee by his or her employer.
An example of an electronic statement would be those produced by a restaurant employer's point-of-sale system.
Keeping track of and reporting tips seems like a lot of work.
The IRS realizes that tip reporting can be burdensome, and we are doing something about it.
We want to reduce taxpayer burden and improve tip reporting, so we've developed voluntary compliance agreements for industries where tipping is customary.
Voluntary agreements improve compliance among tipped employees and their employers through education and accounting, internal controls, as opposed to enforcement actions, like audits.
Many tip-reporting agreements allow the employer to compute an employee's tips using tip rates and other information.
Employers include the computed tips in the employee's W-2 at the end of the year, and no one is required to keep day-to-day records.
Practically, the IRS has found this to be less burdensome for employers, employees, and the IRS.
Additionally, some tip agreements provide employers with protection from tip examinations, as long as the employer is meeting the terms of the agreement.
Similarly, employees who participate in such agreements will also be exempt from tip examinations, as long as they meet their participation requirements.
There are other bonuses, too.
When tipped employees apply for mortgages, car loans, or other financial loans, they'll have a more accurate financial report.
At retirement, their Social Security and Medicare benefits may be higher.
If something should happen to them at work, their worker compensation insurance benefits would be more consistent with their actual monthly income.
The same goes for unemployment and other income-based benefits.
While we believe participating in tip agreements benefit everyone, the IRS cannot mandate employee or employer participation.
However, some employers who have entered into a tip agreement with the IRS do require their employees to participate.
Here are some suggestions for employees who are not participating in an IRS tip agreement.
Keep good records, and report all of the tips you get to keep to your employer.
Keep detailed records of tips paid out to others through tip-sharing or tip-pooling agreements.
Many restaurants and other service businesses have point-of-sale systems that make such recordkeeping easier because the system automatically records tips on credit cards and prompts employees to enter cash tips, tip outs, and tip ins at the end of their shift.
If an employee is subject to a tip examination and has not kept accurate records of his or her tip income, IRS examiners will use the employer's records to help determine an employee's correct tip income.
There is a lot of helpful information about tip reporting and tip-reporting agreements on our website, at www.IRS.gov.