A Guide To Employee Tips: What They Are and How To Track Them
Service industry employees get paid an hourly wage, but they often rely on tips for the majority of their income. When you enter this industry and become a tipped employee, you should keep track of your tips so that you can accurately report your income on your taxes, effectively budget or open a line of credit. In this article, we explain what employee tips are, what a daily tip record is and how to record and report your tips to your employer and on your tax return.
What are employee tips?
Employee tips, sometimes called a gratuity, are additional and optional payments that a customer gives to a service employee for satisfactory service. The customer decides the amount tipped, but certain industry standards guide the advised gratuity amount that customers should give to a tipped employee. For example, in the U.S., the suggested tip for service industry staff, such as bartenders and waiters, is 15% to 20% of the total bill.
Customers give tips directly to the server a majority of the time, but some employers use a tip pooling system in which various employees split the tips, usually from a tip jar. The policies for how these tips are split depend on the employer. Sometimes tip pools include staff members that rarely receive tips, such as janitors, chefs, cooks, bussers or dishwashers.
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Who earns tips?
The U.S. categorizes tipped employees as anyone that regularly earns at least $30 a month in tips. Some professions that commonly earn tips are:
According to federal labor standards, employers must pay tipped employees at least $2.13 per hour or more if the total amount of tips and wages is less than the current federal minimum wage. Employers can pay tipped staff differently, but the exact wage depends on the industry, profession and state minimum wage for tipped employees. Though tipping is customary in the United States, there are some countries where the practice is less frequent because employees are paid higher wages. For example, tipping isn't common in most European countries.
What counts as a tip?
Here are the characteristics that qualify a tip:
The customer has the freedom to decide who gets the payment.
There is no policy or negotiation involved in the payment.
The customer has the right to decide the amount that they will tip.
The customer must give the tip freely and voluntarily.
In addition to these general qualifications, other distinctions that impact what is and is not considered a tip include what form employees receive their tips in and whether the amount paid goes toward service charges.
Forms of tips
Tips that are received from debit cards, credit cards or in cash are referred to as cash tips. Tips that are given on a debit or credit card are reimbursed to the employee from the employer. Aside from cash and credit card tips, there are times when you might receive noncash tips from customers. These often come in the form of valuable items, such as tickets.
Aside from receiving tips from customers, service industry staff often tip out fellow employees for their contribution to customer service. This is commonly seen when an employee gives a portion of their tips to a:
Tips vs. service charges
There are additional payments customers may have called service charges that are different from employee tips. The primary difference between the two is that employers mandate service charges and receive the payment, while tips are voluntary and given to the server. Some examples of service charges are:
Charges for bottle service in a restaurant or nightclub
Room service charges in a hotel room
An additional fee for hosting an event or banquet
An added gratuity for accommodating a large party in a restaurant
What is a daily tip record?
A daily tip record is a way for you to keep track of how much cash and non-cash tips you receive throughout the year so that you know how much money you make and have all of the necessary income information when filing your tax return. There are many ways to keep track of your tips, including using applications specifically designed for tracking daily tip amounts, creating a spreadsheet or writing your tips in a notebook at the end of each shift. Additionally, the IRS has a daily tip record called the Employee's Daily Record of Tips, or Form 4070-A, available for tipped employees to use.
Whatever resource you use to record your daily tipped income, just make sure that you note:
Total tips received from customers
Total tips received from other employees in a tip pooling system
Debit and credit card tips
Any tips that you paid out to your fellow employees
The names of the colleagues that you tipped out
How to record and report tips
Here are the steps you need to take if you are a tipped employee:
1. Maintain a daily tip record.
To keep thorough and accurate records, you should sit down at the end of each shift to log how much you made in tips. Service charges should be left out of your daily tip record, any reports to your employer and on your income taxes. If your employer uses a tip pooling system, each employee is responsible for keeping track of and claiming the tips they made individually from the pool.
2. Inform your employer of your total tip income.
If you make more than $20 in cash tips (including debit and credit card tips) per month, you need to report it to your employer. Some employee management systems ask you to claim your tips at the end of each shift before you clock out. If your employer doesn't have one of these systems, you may need to draft a written statement that includes:
Your name, home address and Social Security number
Your employer's name (or the name of the company if it's different) and address
The month or other period of time that your report is for
The total amount of tips that you earned during the applicable month or period
Though your employer may have different guidelines and rules for reporting your tips and may ask you to do it more frequently, you should turn in a tip report at least once a month.
3. Report your tip income to the IRS.
Your tips are untaxed when you receive them, which means that you must pay the taxes on this additional income at the end of the year. When it's time to file your income taxes, you need to make sure that your account for any unreported tip income that you made by filling out Form 4137. This is the Social Security and Medicare Tax on Unreported Tip Income form that allows you to add additional wages to your Individual Income Tax Return, Form 1040 or 1040-SR.
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