Do I Have to Report Cash Tips?
Let’s start with a basic rule: Cash tips are taxable and need to be reported as part of an employee’s income. The logistics of how to collect and receive tip information becomes a bit more problematic.
The IRS defines tips as discretionary payments determined by a customer that employees receive from customers, whether paid in cash or included as part of the customer’s payment.
When an employee gathers a cash tip and just pockets it, how does the employer know whether the employee received a cash tip? Luckily for the employer, the employee is responsible for reporting all tips to the employer. Even so, it is the employer’s responsibility to train the employee how to report tips.
To meet the employer’s responsibility, our recommendation is for employers to create a standard process to be used by all employees.
Here are two main processes the employer can train the employee to use:
1. Use a Daily Tip Record on Paper or in a Spreadsheet
The IRS has created Form 4070A for employees to use to track their daily tips and Form 4070 for employees to report monthly tips to the employer. This method isn’t fancy, but it gets the job done. You can find examples of these forms in IRS Publication 1244. You can also find the forms included here as PDFs.
2. Have the Employee Enter Tips into the Time/Shift Tracking Program
Many employers use a time/shift management software package that can collect tip information from the employee. Some software packages allow the employee to input the amount of tips associated with each customer tab. This method, while effective, can be time-consuming for the employee.
Another option is to require employees to enter the total tips received when clocking out at the end of their work shift. In many programs, the tip reporting can be a mandatory field for employees to fill out as they end their shift. This method allows the employee to enter just one total at the end of each shift.
If you have any questions about reporting tips, please reach out, we are happy to help.
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