Social Security Tips (W-2)

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When customers are satisfied with the service they receive, they leave a good tip. For the recipient of the tip, it’s not as simple as putting the tip in their pocket at the end of the shift and calling it a good day. When it comes to tips, there are certain responsibilities that both employees and employers must do. 

What are “Social Security tips”? 

When we say Social Security tips, these are the tips or discretionary earnings that employees receive from customers. Tips are both additional and optional payments that customers freely give. These tips can come in different forms. Tips can be cash received directly from customers or they can be given when the customer settles the bill through electronic payment via credit, debit, or a gift card. Additionally, tips can be noncash such as tickets. Also, tips can be paid out through splitting tips, tips shared by other employees, or any arrangement designed for tip sharing. 

The bottom line is that all kinds of tips, cash or noncash, are taxable. They are subject to federal income taxes. Social Security and Medicare taxes apply to all cash tips that employees receive in any month. 

What are some examples of tips?

If it is unclear as to what qualifies as a tip, take a look at the following conditions.

Here are some examples of tips:

What types of businesses usually have employees who report tips? 

Generally, businesses that have employees who receive and report tips are those belonging to the service, travel, or hospitality industries. 

Are tips the same as “service charges”?

No, tips and service charges are not the same. We mentioned above that tips are additional payments that customers give freely and voluntarily. They are not required and the customer decides the amount of the tip and who they would like to give it to. 

In contrast, service charges are charges that are added by the business to the customer’s bill. For example, a business may charge customers service charges for large parties or events, room service charges, delivery charges, and bottle service charges. Customers are required to pay service charges by the business. Service charges are considered non-tip wages. 

I am an employee who receives tips at my job. What must I do? 

If you are an employee who receives tips from customers in the workplace, you have three primary responsibilities. These are:

 

 

I am an employee who receives tips at my job. When am I supposed to report tips to my employer? 

You need to report tips to your employer every 10th of the month after the month when the tips were received. For example, all the tips you received in May 2021 must be reported to your employer on or before June 10, 2021. 

I am an employer of employees who receive tips in the workplace. What must I do about tips? 

As an employer, you have many responsibilities regarding tips that your employees receive. First, it is your responsibility to include the employee’s tip income on their paycheck and give the tip amount to the employee if paid via debit or credit card transaction. 

You must keep all the tip reports that your employees submit. You need to withhold appropriate taxes such as income taxes, the share of employees for Social Security and Medicare taxes and deposit these taxes. Keep in mind that you, as an employer, must also pay your share of Social Security, Medicare, and FUTA taxes based on the total wages paid to employees and their reported tip income. 

Furthermore, employers take charge of completing, reporting, and filing Form W-2, Form 941, and Form 940 and depositing these taxes according to federal tax requirements. 

Please note that if an employee does not report tips to you as the employer, you will not be held liable for the employer's share of Social Security and Medicare taxes on the tips that were not reported. This is unless notice is received from the Internal Revenue Service (IRS).

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