Social Security Tips (W-2)

When customers are satisfied with the service they receive, they leave a good tip. For the recipient of the tip, it’s not as simple as putting the tip in their pocket at the end of the shift and calling it a good day. When it comes to tips, there are certain responsibilities that both employees and employers must do. 

What are “Social Security tips”? 

When we say Social Security tips, these are the tips or discretionary earnings that employees receive from customers. Tips are both additional and optional payments that customers freely give. These tips can come in different forms. Tips can be cash received directly from customers or they can be given when the customer settles the bill through electronic payment via credit, debit, or a gift card. Additionally, tips can be noncash such as tickets. Also, tips can be paid out through splitting tips, tips shared by other employees, or any arrangement designed for tip sharing. 

The bottom line is that all kinds of tips, cash or noncash, are taxable. They are subject to federal income taxes. Social Security and Medicare taxes apply to all cash tips that employees receive in any month. 

What are some examples of tips?

If it is unclear as to what qualifies as a tip, take a look at the following conditions.

• It is not forced, compulsory, or required from the customer;
• The customer gives the tip voluntarily;
• The customer decides who will receive the tip;
• And, the customer is the one who freely determines the amount of the tip as well as the form of payment. 

Here are some examples of tips:

• Cash tips
• Tips made from electronic payment
• Credit card tips
• Debit card tips
• Tip pools
• Tip jars
• Tip-sharing arrangements with other employees like bartenders, waiters, bussers, dishwashers, etc.
• Gift cards
• Non-cash tips like tickets

What types of businesses usually have employees who report tips? 

Generally, businesses that have employees who receive and report tips are those belonging to the service, travel, or hospitality industries. 

Are tips the same as “service charges”?

No, tips and service charges are not the same. We mentioned above that tips are additional payments that customers give freely and voluntarily. They are not required and the customer decides the amount of the tip and who they would like to give it to. 

In contrast, service charges are charges that are added by the business to the customer’s bill. For example, a business may charge customers service charges for large parties or events, room service charges, delivery charges, and bottle service charges. Customers are required to pay service charges by the business. Service charges are considered non-tip wages. 

I am an employee who receives tips at my job. What must I do? 

If you are an employee who receives tips from customers in the workplace, you have three primary responsibilities. These are:

• You must keep a daily tip record. If you receive a tip, record it. Monitor and keep track of the tips that you receive daily. All forms of tips, cash, non-cash, or anything of value, should be recorded. To do this, you can IRS Form 4070A (Employee’s Daily Record of Tips). Don’t forget to take note of the date and amount of tips that you receive. 
• You must report tips to your employer. As per the Internal Revenue Code, you are required to report all tips to your employer in a written statement. You must include cash tips, non-cash tips, tips from debit or credit card charges, and tips from any tip-sharing arrangement. The only time that you are not required to report tips to your employer is if the total tips you received in a month is less than $20. You may use IRS Form 4070 (Employee’s Report of Tips to Employer) or an electronic system provided by your employer to report tips. 

• You must report all tips on an individual income tax return. You can use IRS Form 4137 (Social Security and Medicare Tax on Unreported Tip Income). These are for tips that you did not report to your employer and any tips reported as income. 

I am an employee who receives tips at my job. When am I supposed to report tips to my employer? 

You need to report tips to your employer every 10th of the month after the month when the tips were received. For example, all the tips you received in May 2021 must be reported to your employer on or before June 10, 2021. 

I am an employer of employees who receive tips in the workplace. What must I do about tips? 

As an employer, you have many responsibilities regarding tips that your employees receive. First, it is your responsibility to include the employee’s tip income on their paycheck and give the tip amount to the employee if paid via debit or credit card transaction. 

You must keep all the tip reports that your employees submit. You need to withhold appropriate taxes such as income taxes, the share of employees for Social Security and Medicare taxes and deposit these taxes. Keep in mind that you, as an employer, must also pay your share of Social Security, Medicare, and FUTA taxes based on the total wages paid to employees and their reported tip income. 

Furthermore, employers take charge of completing, reporting, and filing Form W-2, Form 941, and Form 940 and depositing these taxes according to federal tax requirements. 

Please note that if an employee does not report tips to you as the employer, you will not be held liable for the employer's share of Social Security and Medicare taxes on the tips that were not reported. This is unless notice is received from the Internal Revenue Service (IRS).