Learn how to report your employee’s earned tips in QuickBooks Online Payroll and QuickBooks Desktop Payroll for tax purposes.
If your employees received tips from customers, you’re required to track and withhold taxes from those tips. If the tip is less than $20 per month, tips aren’t subject to federal taxes. Visit the IRS website to learn more.
Follow the steps below to report tips on paychecks and payroll forms.
Step 1: Determine what type of tips your employees received
Cash tips
Cash tips are tips your employees receive directly from customers in cash, not through a paycheck. Tips given through credit card charges converted to cash are also considered Cash tips.
These tips are taxed, but shouldn’t be included in employees’ net pay, as they've already received it.
Paycheck tips or Credit Card tips
These tips are mostly received through credit or debit card charges, gift cards, or any other electronic payments. You can give these tips to your employees through their paychecks along with their regular pay.
Allocated tips
If you pay out allocated tips to your employees during the year, contact us at year end to make sure the tips are reported correctly on W-2 forms.
Tip Credit
Fair Labor Standards Act (FLSA) Section 3(m) permits an employer to take a tip credit toward its minimum wage obligation for tipped employees equal to the difference between the required cash wage (which must be at least $2.13) and the federal minimum wage. Thus, the maximum tip credit that an employer can currently claim under the FLSA is $5.12 per hour (the minimum wage of $7.25 minus the minimum required cash wage of $2.13).
Note that the regulations for tip credits vary per state. To pay tip credits, you can set it up as another hourly rate in QuickBooks.
Step 2: Set up a payroll item for tips in QuickBooks
Note: Not sure which payroll service you have? Here's how to find your payroll service.
QuickBooks Online Payroll
- Go to Payroll, then Employees (Take me there).
- Select your employee.
- From Personal Info, select Edit.
- In Additional pay types, select Cash Tips or Paycheck Tips.
- Select Save.
QuickBooks Desktop Payroll
Step 1: Create an additional payroll item for taxable tip amount
Use this payroll item to report all the tips the employee received.
- Select Lists, then Payroll Item List.
- Select the Payroll Item ▼ dropdown, then New.
- Select Custom Setup, then Next.
- Select Addition, then Next.
- Enter the name of the item (for example, Tips In). Select Next.
- Select the Expense account where you want to track the item, then Next.
- In the Tax tracking type window, select Reported Tips.
- Select Next three times, then Finish.
Step 2: Create a payroll deduction item for tips kept by the employee
Use this payroll item to take away the tips that the employee already received.
- Select Lists, then Payroll Item List.
- Select the Payroll Item ▼ dropdown, then New.
- Select Custom Setup, then Next.
- Select Deduction, then Next.
- Enter the name of the item (for example, Tips Out). Select Next.
- In the Liability Account ▼ dropdown, select the same account you had in the Expense account field for Addition item (tips in). Select Next.
- In the Tax tracking type window, select None.
- Select Next three times.
- Select net pay in the Gross vs. net window.
- Select Next, then Finish
Step 3: Report tips on paychecks and payroll forms
QuickBooks Online Payroll
QuickBooks Desktop Payroll
Run your scheduled or unscheduled payroll. In the paycheck detail, add the Addition item and the amount under the Other Payroll Items section.
If the employee receives the tips in cash, you need to enter the deduction item in the Other Payroll Items section. This is to take the amount out so they don’t get paid for the cash tips again.
FAQs
Generally, you must report all tips you received in the tax year on your tax return including both cash tips and noncash tips. Any tips you reported to your employer as required in the tax year are included in the wages shown in box 1 of your Form W-2.
What happens if you don't report tips on taxes? ›
What are the potential penalties for failing to report tips accurately? If you fail to report your tips to your employer, the IRS can impose a penalty equal to 50% of the Social Security and Medicare tax you fail to pay.
How much of my tips should I report? ›
As an employee who receives tips, you must do three things: Keep a daily tip record. Report tips to the employer, unless the total is less than $20 per month per employer. Report all tips on an individual income tax return.
How do you report tips as wages? ›
If your tips each month are $20 or more, they're taxable income. They're also subject to Social Security and Medicare tax withholding. If you receive $20 or more per month in cash tips, report that income to your employer. Your employer will report your tip income on your W-2, Box 7 (Social Security tips).
What happens if you don't report cash tips to IRS? ›
Underreporting could result in you owing substantial Federal Income, Social Security and Medicare penalties, and interest. If I report all my tips to my employer, do I still have to keep records?
Is not reporting cash tips tax evasion? ›
The truth is, neglecting to declare cash tips, while it technically counts as tax fraud, is not likely to land someone in the slammer unless they're earning some seriously good tips. That being said, an IRS audit experience can wind up being extremely expensive and stressful.
Can you get audited for not reporting tips? ›
Tips are taxable income, and a failure to properly report your tip income could lead to the following issues: IRS audit of your return. Back taxes owed. Interest and penalties added to your tax debt.
What percentage of tips are taxed? ›
Businesses such as restaurants, hotels, caterers, boarding houses, drive-ins and similar establishments often receive payments designated as tips, gratuities, and service charges from their customers. An optional payment designated as a tip, gratuity, or service charge is not subject to tax.
What to do if employer doesn't report tips? ›
You can either file a wage claim with the Division of Labor Standards Enforcement (the Labor Commissioner's Office), or you can file a lawsuit in court against your employer in to recover the lost wages.
How does the IRS know your tips? ›
You must report tips you received (including both cash and noncash tips) on your income tax return. Any tips you reported to your employer are included in the wages shown in box 1 of your Form W-2, Wage and Tax Statement. Add to the amount in box 1 only the tips you didn't report to your employer as required.
The employer combines the reported tips with the employee's regular wages and reports the total in Items G and H on the DE 9C. The employer withholds SDI contributions and PIT withholdings on the employee's reported tips from one of the following: - Wages payable at the time the tip statement is filed by the employee.
Do servers report all cash tips? ›
Whether or not you're required to allocate tips, your employees must continue to report all tips to you, and you must use the amounts they report to figure payroll taxes.
Is it the employer's responsibility to report tips? ›
One of the many responsibilities restaurant managers have is tracking and reporting the income, including tips, received by tipped employees. It's technically up to the employee to track and report any gratuity income received over $20 each month.
Are tips counted as income? ›
Tips can come in many forms. Whether someone pays a tip with cash, check, debit card, or credit card, tips are considered income by the Internal Revenue Service (IRS) and are subject to federal and state taxes.
What is the difference between cash tips and paycheck tips? ›
They are given directly to the service provider, often immediately after service has been rendered. This method allows service staff to receive gratuity instantly, providing immediate access to their earnings. Paycheck tips, on the other hand, are tips that are added to an employee's regular paycheck.
Does the IRS take anonymous tips? ›
Report suspected tax law violations
We will keep your identity confidential when you file a tax fraud report. You won't receive a status or progress update due to tax return confidentiality under IRC 6103.
How does IRS find out about cash income? ›
Most businesses and organizations are required to file “information returns” with the IRS, — IRS Forms W-2, IRS Forms 1099, and others — when they “pay” you. The IRS matches the information on these information returns to your tax return. If they do not match, you will get a notice asking about the difference.
