Taking orders and keeping things in order
So how do you keep the IRS out of your tip jar? First and foremost, follow the reporting requirements.It doesn't matter what your annual salary is. If you received tips totaling more than $20 in a month, report the amount to your boss by the 10th of the following month. Of course, if the 10th is a weekend day or holiday, you have until the next business day to report it.
The IRS doesn't care how you track your tip amounts, but any time you deal with tax reporting it's a good idea to have as complete and accurate records as possible. An easy way to document your tip information is to use the paperwork -- Form 4070A and Form 4070 -- that the IRS has created. Both forms are part of a booklet called Publication 1244.
Form 4070A is a log so you can keep daily track of your tips. You don't have to file it with your boss or the IRS, but it's a quick way to accurately record the tips. And if the IRS ever questions you, it's a supporting document for your case.
After you've added up all your tips and they are (let's hope) more than $20, let your boss know the amount. You need to provide your name, address, Social Security number, your employer's name or business name and address, the month for which you got tips and the total you received. This can all be entered on Form 4070.
Allocated tips
If you work for a large restaurant, you may find when you get your W-2 form at the end of the year that you got tips you didn't know about. How can this be?Thank -- or blame -- your co-workers.
Restaurants with a large serving staff report a total called "allocated tips" to the IRS. In essence, this is what your boss thinks you should have made in tips. This system was designed to ensure that the IRS is informed of what it considers reasonable tip income for all eligible employees, regardless of whether they actually got any tips.
How are these "reasonable" tips figured? Your boss takes a percentage, usually 8 percent but no less than 2 percent, of his restaurant's overall food and drink sales and subtracts from that the total of all the tips you and your co-workers report for the month. The result is what is believed to be unreported tips and is parceled out to employees as allocated tips. It's up to your boss to decide how to attribute these tips to each employee, for example, by giving each of you a portion based on how long your shift is.
If all employees are reporting their tips in full and on time, there is no need for a restaurant to allocate tips. But if your buddy decides he's only reporting $50 of the $120 tip he got on a $600 meal for the group at the back table, the restaurant owner likely will presume the tip was underreported. That triggers the computing of allocated tips for all employees.
Your good recordkeeping can help you out, though. There are two cases where you don't have to report allocate tips as income:
- You kept a complete, detailed daily tip record showing your actual amount of tips.
- You skipped a couple of tip notations in your daily log, but your record still reveals the actual tips you earned were more than the combined total of what your employer's records show and the allocated tip amount on your W-2.
If you don't have the records and must report the allocated tips, add the W-2's box 8 amount to the salary and wages shown in box 1 and report it all as income on line 7 of your Form 1040.
Social Security and Medicare taxes
You do have to use Form 1040 instead of the other two, less-complicated forms. This is because Social Security and Medicare taxes weren't withheld from allocated tips, and these taxes now must be figured separately on your return. You can figure the amount using Form 4137.You'll also need this form if you were out sick on the 10th one month and didn't report your tips to your employer. There's also a line for entering the tips that you didn't have to file with your boss because the monthly total was less than $20. Even though these smaller amounts aren't reportable to your employer, Social Security and Medicare taxes are due on any tips, regardless of how small the amount.
By transferring the data on your W-2 to Form 4137, you'll determine how much of your tips were not subject to Social Security and Medicare taxes and compute the amount due for them. This amount of tax is entered on your Form 1040 (line 58 for the 2008 version). This helps ensure that you get appropriate credit so you'll get more Social Security money when you retire.
So good luck on your new job. Keep smiling, serve the coffee hot and salads cold, and you'll be sure to get a fat tip. And by keeping track of and reporting those gratuities, you'll avoid having to serve up a tray full of answers at tax time to the IRS.