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Tip Reporting

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Transcript for tip reporting

This is Jean Wetzler.

I'm talking with John Imhoff about income from tips.

John, what advice can you give businesses to make sure they report employee tips accurately? 

The first thing an employer should do is to remind their employees that all tips received are taxable.

They should report their tips to their employer.

The best way to do this is to use IRS Form 4070, Employee's Report of Tips to Employer, or a similar statement.

Keeping track of tips and reporting them seems like a lot of work.

Is there anything that can minimize that?

We realize that tip reporting can be burdensome, and the IRS is doing something about that.

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, 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.

That does sound less burdensome.

Do tip agreements have other benefits?

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.

And at retirement, their Social Security and Medicare benefits might be higher.

Do all employees have to participate in their employer's agreement?

No.

While we believe participating in tip agreements benefits everyone, the IRS cannot mandate employee participation.

However, some employers do require their employees to participate.

You mentioned some agreements exempt employees from tip audits; do you have any suggestions for those who are subject to the audits?

Yes, I do.

They should keep good records and report all of their tips to their employer.

Many businesses have point of sale systems that make such recordkeeping much easier because they automatically record tips on credit cards and prompt employees to enter any cash tips they receive.

If an employee is subject to a tip examination and has not kept accurate records of their tip income, examiners will use the employer's records to help determine an employee's correct tip income.

Where can I find more information about tip reporting?

We have a lot of helpful information about tip reporting and tip reporting agreements on our Web site, IRS.gov.

Thank you, John.

I've been talking with John Imhoff of the IRS.

This is Jean Wetzler.

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