Employer and other payor responsibilities
An employer has several responsibilities related to employee tip income, including recordkeeping and reporting requirements, collecting taxes on tips, filing certain forms and paying or depositing taxes.
Employers are required to retain employee tip reports. Employers are also required to withhold taxes (including income taxes and the employee's share of Social Security tax and Medicare tax) based upon wages and tip income received by the employee and must deposit these taxes. In addition, employers are required to pay the employer share of Social Security and Medicare taxes based on the total wages paid to tipped employees as well as the reported tip income. The employer reports this information to the IRS on the appropriate forms.
Tips reported to the employer by the employee must be included in Box 1 (Wages, tips, other compensation), Box 5 (Medicare wages and tips), and Box 7 (Social security tips) of the employee's Form W-2. Enter the amount of any uncollected Social Security tax and Medicare tax in Box 12 of Form W-2. Employers must separately report the total amount of cash tips reported to the employer on Form W-2 (Box 12, code TP) and include the applicable Treasury Tipped Occupation Code(s) in Box 14b. For more information, see the
General Instructions for Forms W-2 and W-3.
Other payors (including businesses paying independent contractors) must separately report tip income paid in the course of a trade or business to payees on Forms 1099-NEC, 1099-MISC and 1099-K, and include the applicable Treasury Tipped Occupation Code(s).
Notice 2025-62 and
Notice 2025-69 and provide transition relief from these requirements for 2025.
Employers must report income tax withheld, Social Security and Medicare taxes withheld from employee wages, and the employer share of Social Security and Medicare taxes on
Form 941, Employer's Quarterly Federal Tax Return. Employers must also deposit these taxes pursuant to federal tax deposit requirements.
Most employers must also file
Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, and deposit those taxes. Only the employer pays FUTA tax as it is not withheld from the employee's wages.