The IRS 4070 Forms include the following two documents:
Tips are considered income and are subject to federal income tax. Tips can be received in cash, added to debit or credit card charges, or in items of value, such as concert tickets or passes to an event.
If the amount of extra payment, the employee receiving it is determined by a customer, it is made free from compulsion and is not dictated by establishment policy, this payment can be considered a tip and should be recorded. If the establishments add service charges, they must not be reported.
Employees must report tips to employers, including cash tips, tips received from card payments, and tips received from other employees from tips sharing to their employer and all received tips on their annual tax return. The employer requires tips reporting for proper tax withholding from the employee's paycheck and report their income correctly to the Social Security Administration (SSA). Proper reporting of tip income will influence the benefits the employee will receive after they retire. Also, the employer's share of Medicare and social security taxes will depend on the employee's earnings.
Using IRS tip-reporting forms is voluntary and the forms are provided to facilitate the process. The employer can use their own tip reports and if the employee desires, they can keep their own record of tips. The record must contain their name and tips, received from customers in cash and from card payment, and paid to other employees must be recorded separately. If the establishments use an electronic form of tips record, the paper record must be used for reporting cash tips anyway.
Failure to report tips to the employer may lead to a penalty of 50% of the social security and Medicare taxes due to unreported income. However, if the employee can provide a reasonable ground for non-reporting their tips, the penalty will not be imposed.