Social Security Tips (W-2)

What Are Social Security Tips?

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.

What Qualifies as a Tip?

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

  1. They are not mandated for, or coerced from, the customer.
  2. The customer determines who receives the payment.
  3. The customer must have free will to determine the amount given.
  4. The form of payment is up to the customer’s choice.

Examples of qualified tips include:

Service Charges

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:

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What Business Types Typically Have Employees Who Report Tips?

Typically, the businesses that have employees who report tips are in the service, travel, or hospitality industries.

Some commonly tipped professionals include:

Are Tips Taxed Differently Than Wages and Other Income Sources?

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.

Who Is Responsible for Tracking and Reporting Tips?

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:

What Happens if an Employee Fails To Report Their Tips?

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.”

What Are the Employer's Responsibilities Regarding Tips?

The employer’s responsibilities regarding tips are to:

  1. Ensure employees are paid a high enough hourly wage that it meets the federal or state minimum wage requirement once tips are included.
  2. Give the tip amount to the employee when one is paid via credit or debit card transaction.
  3. Portion out pooled tips according to formal or informal arrangements.
  4. Collect employee tip income reports.
  5. Include all the employee’s tip income on each paycheck.
  6. Withhold taxes on the employee portion of reported tips for:
    1. Income taxes
    2. Social Security
    3. Medicare
  7. Pay taxes on the employer’s portion of:
    1. Social Security taxes
    2. Medicare taxes
    3. FUTA taxes
  8. Include employee tip income and withholding in payroll tax reports:
    1. Form 941
    2. Form 940
  9. Make federal tax deposits as required.
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