What is IRS Publication 531

IRS Publication 531 is a document published by the Internal Revenue Service (IRS) that details how employees who have received tips as part of their compensation are to report that income for tax purposes.

All tips are subject to federal income tax and most are subject to Social Security and Medicare tax, regardless of whether they are received directly from an employer or through a tip-sharing arrangement with other employees. How such income is to be reported, and when taxes are paid or withheld, is explained in the publication.

BREAKING DOWN IRS Publication 531

IRS Publication 531 is necessitated because many American service employees, such as waiters and taxi drivers, earn much of their living directly from their customers’ tips, not their employers. This dynamic has vexed tax collectors at every level of government for many decades, since under-reporting of tips is not always obvious. 

The broad adoption of a credit-card retail economy has eliminated much under-reporting: in North America, tips can be added to the credit card bill. That paper trail has boosted accurate tip income reporting of service employees, but it still leaves the problem of accounting for tip income, and the timely collection of taxes on it.

Publication 531 Provides Instructions on Filing Form 4070

Publication 531 explains that monthly tip income greater than $20 must be reported to an employer, who must in turn withhold income tax. Employees use Form 4070 when reporting tips to an employer, which they can receive by requesting IRS Publication 1244 from the IRS or their employer. Publication 1244 contains a year's supply of Form 4070, which must be filled out every month, by the tenth day of the following month.

On the monthly form, employees must total their cash tips plus credit and debit card tips received during the month, then deduct any tips they paid out to other employees. To get an accurate total, Publication 531 requires employees keep a daily record of tips, either on Form 4070A, also included in Publication 1244, or by saving copies of bills and credit card receipts.

Employer Is Obligated to Withhold Taxes on Tips

The employer must then deduct withholding tax from the employee’s paycheck for the reported tips. If the paycheck is not large enough to cover the tax, the employer can collect it from the employee’s successive paychecks. If taxes remain unpaid by the end of the tax year, the employee will be subject to penalties for non-payment of estimated taxes.

Allocated Tips Are Reported Differently

Some companies, including many restaurants, collect all tips received and allocate them equitably to all employees. In that case, employees are not obliged to fill out Form 4070 as the income will already be reported by the employer, based on a formula outlined in Publication 531. However the employer does not pay Social Security tax on allocated tip income, so employees may face additional taxes at the end of the year.