Split the bill here in seconds. If you are on the other side of the counter, the harder math starts after the tip is counted: what gets reported, what gets withheld, and what shows up on your own paycheck.
The tip is calculated on the full bill, then the total is split evenly.
What happens between the customer handing over $9 and that money showing up in a server's take-home pay is a payroll process most diners never see. Card tips are usually already visible to the employer through the point-of-sale system and get taxed automatically like any other wage. Cash tips are not visible to the employer at all unless the employee reports them, which is where federal rules step in.
Under IRS Topic No. 761, an employee who receives $20 or more in tips in a calendar month, cash or otherwise, must report the total to their employer in writing by the 10th of the following month. Many employers handle this through a timekeeping system rather than the paper Form 4070, but the underlying obligation is the same either way. Once reported, the employer withholds federal income tax and FICA on the tip income exactly as it would on wages, and the amount shows up on the employee's next paycheck stub as tax already taken from money the employee already received in cash.
| Tip handling | What happens |
|---|---|
| Card tip | Visible to employer via POS, taxed automatically |
| Cash tip under $20/month | No reporting requirement, but still taxable income |
| Cash tip $20+/month | Must be reported to employer by the 10th of the next month |
| Unreported tip income | Employee can owe back tax plus FICA via Form 4137 if discovered |
The federal Fair Labor Standards Act lets an employer pay a tipped worker a direct cash wage as low as $2.13 an hour and count up to $5.12 in tips toward the rest of the $7.25 federal minimum wage. That $5.12 gap is the tip credit. If a worker's tips in a given week do not cover the gap, the employer is required to make up the shortfall so total pay still reaches $7.25 an hour. Many states set a higher cash minimum for tipped workers or eliminate the tip credit entirely, so the federal $2.13 figure is a floor, not a national standard.
Box 7 on a Form W-2 reports Social Security tips separately from Box 1 wages, because tips are tracked as their own category of compensation even though they are taxed at the same rates. Larger food and beverage establishments also file Form 8027 annually, summarizing total receipts and reported tips. If reported tips across the staff fall below a set share of sales, the employer may need to allocate additional tip income to employees for tax purposes, which can appear as allocated tips on a W-2 separate from what was actually reported.
Sources: IRS, Tip Recordkeeping and Reporting, U.S. Department of Labor, Tipped Employees.
Want to see what a reported tip actually does to a paycheck once withholding applies? Run the total through the paycheck calculator.
Yes, if they add up to $20 or more in a month for one job. The IRS requires employees to report cash and card tips to their employer in writing by the 10th of the following month, commonly using Form 4070 or an employer's equivalent system, so payroll can withhold FICA and income tax on them.
Under the federal tip credit, an employer can pay a tipped worker a direct cash wage as low as $2.13 an hour and count up to $5.12 of tips toward the rest of the $7.25 federal minimum. If tips in a given week fall short of that gap, the employer must make up the difference.
Card tips are usually already visible to the employer through the point-of-sale system and get added to your paycheck with tax withheld automatically. Cash tips are not visible to the employer unless you report them, which is why the reporting requirement exists specifically for cash and other tips paid directly to you.
Unreported tips remain taxable income. If the IRS determines tips went unreported, the employee can owe back income tax plus their share of Social Security and Medicare tax on those amounts, filed using Form 4137, along with possible penalties for underpayment.
Box 7 on a W-2 reports Social Security tips separately from Box 1 wages because tips are tracked and taxed as their own category of compensation. Large food and beverage employers also file Form 8027 annually, which can trigger allocated tips if reported tips fall below a set share of total sales.