Tips that your employee receives are generally subject to social security and Medicare withholding. Your employee must report cash tips to you by the 10th of the month after the month that the tips are received. The report should include tips that you paid to the employee from charge receipts. Also include tips that the employee received directly from customers and other employees, and indirectly (for example, tip splitting). The report should not include tips that the employee paid out to other employees. No report is required for months when tips are less than $20. Your employees report tips on Form 4070, Employee's Report of Tips to Employer, or on a similar statement. They may also use Form 4070A, Employee's Daily Record of Tips, to keep a record of their tips. Both forms are printed in Publication 1244, Employee's Daily Record of Tips and Report of Tips to Employer, available from the IRS.
The 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 that the report covers.
- The total tips received during the month or period.
You must collect the employee social security and Medicare taxes on the employee's tips. You can also collect these taxes from the employee's wages or from other funds that he or she makes available. Stop collecting the employee social security tax when his or her total wages and tips for 2010 reach $106,800. Collect the employee Medicare tax for the whole year on all wages and tips.
You are responsible for the employer social security tax on wages and tips until the wages (including tips) reach the wage base limit. You are responsible for the employer Medicare tax for the whole year on all wages and tips. File Form 941-SS (or Form 944-SS) to report withholding and employer taxes on tips.taxmap/pubs/p80-005.htm#en_us_publink1000233950
If, by the 10th of the month after the month you received an employee's report on tips, you do not have enough employee funds available to deduct the employee social security and Medicare tax, you no longer have to collect it.taxmap/pubs/p80-005.htm#en_us_publink1000233951
Report tips and any uncollected social security and Medicare taxes in boxes 1, 5, 7, and 12 on Forms W-2AS, W-2CM, W-2GU, or Form W-2VI and on lines 5b, 5c, and 7c of Form 941-SS (lines 4b, 4c, and 6a of Form 944-SS (line 6 of the 2010 Form 944-SS)). The table in section 12 shows how tips are treated for FUTA tax purposes.
You are permitted to establish a system for electronic tip reporting by employees. See Regulations section 31.6053-1(d).