Social Security tips are discretionary income (tips) an employee receives from customers that   are reported on  their W-2 and are subject to Social Security taxes.  This includes cash tips, credit/debit tip fees, and non-cash tips.

These tips must be reported to the employer so that taxes can be deducted from the employee's wages. Only cash/debit/credit tips that amount to more than $20 during a calendar month must be reported and tax must be deducted on them.

What will be considered a tip?

Discretionary income must meet these four conditions to be considered a qualified tip:

1. These are not mandatory or forced upon the customer.
2. The customer determines who receives payment.
3. The customer must have the free will to determine the amount to be paid.
4. The mode of payment is as per the customer's choice.

Examples of worthy suggestions include:

• Cash Tips
• Electronic Disposal Tips
• Credit Card Tips
• Debit Card Tips
• Gift Card Tips
• Tip-sharing arrangement (commonly used to share tips with bartenders, food runners, bussers, dishwashers, etc.)
• Tip Pool
• Tip split
• Tip jars in fast food, counter service, or cafeteria-style restaurants and other service-oriented businesses
• Other formal or informal tip sharing arrangements
• Non-cash tips
• stamp
• Any other valuable item

Service Charges

Service charges  are not  considered tips. These additional payments are mandated by the employer and are considered part of the employee's non-tipped wages.

Examples of service fees include:

• bottle service fee
• Room service charge
• Automatically added gratuity (such as for a large party at a restaurant)
• Event or banquet fee

What types of businesses typically have employees who provide tip information?

Typically, businesses where employees tip are related to the service, travel or hospitality industries.

Some commonly tipped professionals include:

• hair stylists
• tattoo artist
• Restaurant Servers
• serving alcohol
• Barista
• Food delivery drivers (pizza delivery, Uber Eats, DoorDash, etc.)
• Grocery Delivery Drivers (Walmart, etc.)
• Taxi or other rental car driver (Lyft, Uber, etc.)
• Golf Caddy
• Cruise Steward
• Casino Dealers
• Hotel Bellhops
• apartment building concierge
• apartment building elevator operator
• Residential Concierge
• Residential Security Guard

Are tips taxed separately from wages and other income sources?

Tips of $20 or more in a given month are taxed the same as taxable wages, compensation, and other income sources. This means tips are  subject to the same payroll tax obligations,  including Social Security  ,  Medicare  , and federal unemployment taxes  .

Who is responsible for tracking and reporting tips?

The employee is responsible for tracking and reporting tips to their employer and the IRS when filing income taxes. The tip report is used to report all tip income, including cash, credit/debit card transactions, and other non-cash tips. The employee is responsible for the accuracy of their tip report.

Employees may (but are not required to) use the following to report their tips to their employer:

• Form 4070 (report of tips paid by employee to employer)
• Form 4070A (Daily Record of Employee's Tips)
• Any other similar form designed by the employer himself

What happens if an employee fails to report their tip?

According to the IRS  , “If an employee fails to report tips to his or her employer, the employer is not liable for the employer share of Social Security and Medicare taxes on unreported tips until a notice and demand for the taxes is served on the employer by the IRS.”

In addition, ""the employer is not responsible for withholding and paying the employee share of Social Security and Medicare taxes on unreported tips.""

What are employer responsibilities regarding tips?

Here are the employer's responsibilities with regard to tips:

1. Make sure employees are paid an hourly wage high enough to meet federal or state minimum wage requirements, including tips.
2. When paying by credit or debit card, give the tip amount to the employee.
3. Distribute collected tips according to formal or informal arrangements.
4. Collect employee tip income reports.
5. Include the employee's tip income in each paycheck.
6. Withhold tax on the employee portion of a reported tip:
   1. Income Tax
   2. Social security
   3. Treatment
7. Pay tax on employer's share:
   1. Social Security Tax
   2. Medicare Taxes
   3. FUTA Tax
8. Include employee tip income and withheld amounts in payroll tax reports:
   1. Form 941
   2. Form 940
9. Deposit federal taxes as required   .