An Employer’s Guide to Tips and Taxes

tip jar

For many employers, paying taxes on tips is a confusing concept. However, the service industry is one of the largest in the United States. Thousands of employers across the nation handle it with ease.

There are over 2.6 million waiters and waitresses in the country. This figure is expected to rise by 6 percent through 2028. Tips drive the income level for bartenders, hairstylists, and many other professions.

Read on to answer the question of how are tips taxed. Explore this employer’s guide to taxes and tips, learning topics such as recordkeeping and reporting requirements.

What Is the Fair Labor Standards Act (FLSA)?

The FLSA is the law that governs tipped employees. The standard federal minimum wage of $7.25 does not apply because of this supplemental income.

Instead, tipped employees must be paid a minimum wage of $2.13 per hour. This rate applies to any employee who receives more than $30 per month in tips.

The employer then must demonstrate that the employee receives enough tips to meet the $7.25 threshold. This is commonly referred to as a tip credit.

What Are Employees Responsible For?

Your employees get to keep all the tips that they receive on the job. However, they do have a responsibility to report tips to their employer. This includes net tips received from a pooling agreement with other employees.

Some operate under the misperception that tips are under-the-table income. In other words, they are suggesting that tip income does not have to be reported.

Instead, tips are recorded daily on IRS form 4070A. This daily record is for individual tax purposes. Much of this information can be acquired by reading more from

Of course, this daily record can be used to report to employers as well. On the 10th of each month, the employee must report tips to his or her employer. This report is for tips collected the month prior.

What Is the Employer Responsible For?

The employer is going to use these tip records to meet their obligations under federal and state tax law. First, the employer must withhold the employee’s share of income taxes.

Additional withholdings include the employee’s share to Social Security, Medicare, and other payroll deductions. Based on how much income the employee earns, including tips, the employer calculates their contribution to payroll deductions.

What Forms Is the Employer Responsible For?

The next requirement for employers is to complete IRS forms. On a quarterly basis, the IRS Form 941 is completed reporting employees’ wages. This is the point in which employers pay towards federal income taxes and other payroll deductions

In addition to quarterly requirements, there is also an annual report. IRS Form 940 captures annualized employee wages and deductions.

A Recap of How Are Tips Taxed

Once you get the hang of it, reporting employee tips is not that difficult. The key is meticulous recordkeeping and understanding federal and state requirements. With proper recording, both employees and employers are ready to pay their fair share of taxes.

If you enjoyed this article about how are tips taxed, check out our blog for more great content.



James Williams
James is our Lead Content Publisher here at Feeds Portal. He has worked with many top websites over the years, including BuzzFeed.

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