Glossary of Human Resources Management and Employee Benefit Terms
Social Security tips are the discretionary earnings (tips) an employee receives from customers that are reported on their W-2 and subject to Social Security taxes. This includes cash tips, credit/debit tip charges, and non-cash tips.
These tips are to be reported to the employer so that taxes can be withheld from the employee’s paycheck. Only cash/debit/credit tips that exceed an amount of $20 during a single calendar month must be reported and have taxes withheld.
Discretionary earnings must meet these four conditions to be considered a qualified tip:
They are not mandated for, or coerced from, the customer.
The customer determines who receives the payment.
The customer must have free will to determine the amount given.
The form of payment is up to the customer’s choice.
Examples of qualified tips include:
Electronic settlement tips
Credit card tips
Debit card tips
Gift card tips
Tip-sharing arrangements (commonly used for portioning out tips with bartenders, food runners, bussers, dishwashers, etc.)
Tip jars at fast food, counter service, or cafeteria-style restaurants and other service-oriented businesses
Other formal or informal tip sharing arrangements
Anything else of value
Service charges are not considered tips. These additional payments are mandated by the employer and are considered part of an employee’s non-tip wages.
Examples of services charges include:
Bottle service charges
Room service charges
Automatically added gratuities (such as for a large party in a restaurant)
Event or banquet fees
Typically, the businesses that have employees who report tips are in the service, travel, or hospitality industries.
Some commonly tipped professionals include:
Food delivery drivers (pizza delivery, Uber Eats, DoorDash, etc.)
Grocery delivery drivers (Walmart, etc.)
Taxi or other hired car drivers (Lyft, Uber, etc.)
Apartment building doorkeepers
Apartment building elevator operators
Residential security guards
Tips exceeding $20 or more in a given month are taxed the same way as taxable wages, compensation, and other income sources. That means tips are subject to the same payroll tax obligations, including Social Security, Medicare, and federal unemployment taxes.
An employee is responsible for tracking and reporting tips to their employer and to the IRS during income tax filing time. Tip reports are used to detail all tip income, including cash, credit/debit card transactions, and other non-cash tips. The employee is responsible for the accuracy of their tip reports.
The employee may (but is not obligated to) use the following to report their tips to their employer:
Any other similar form of an employer’s own design
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 the unreported tips until notice and demand for the taxes is made to the employer by the IRS.”
Also, “[t]he employer is not liable to withhold and pay the employee share of Social Security and Medicare taxes on the unreported tips.”
The employer’s responsibilities regarding tips are to:
Ensure employees are paid a high enough hourly wage that it meets the federal or state minimum wage requirement once tips are included.
Give the tip amount to the employee when one is paid via credit or debit card transaction.
Portion out pooled tips according to formal or informal arrangements.
Collect employee tip income reports.
Include all the employee’s tip income on each paycheck.
Withhold taxes on the employee portion of reported tips for:
Pay taxes on the employer’s portion of:
Social Security taxes
Include employee tip income and withholding in payroll tax reports:
Make federal tax deposits as required.