Tipped Employee Definition
A tipped employee is someone who earns $20 or more each month in tips, on top of base salaries or hourly wages. These tips can be in the form of cash, credit charge ups, non-cash valuables, or split-tip programs. All tips are considered taxable income by the IRS and must be carefully documented to avoid penalty.
Employees who receive tips are subject to federal income tax under current Internal Revenue Service rules. Tipped employees must report all gross income they receive while engaged in work-related duties, including those given to them directly by customers or through tip-splitting or pooling programs. Examples of tips include cash and coins, non-cash items that have value (movie tickets, jewelry, etc.), credit card charge-ups, and income that is shared between groups of employees.
When Employees Receive Tips