The IRS has specific regulations for when employees need to report tips on their federal income tax returns. 

Employees are required to report tips of $20 or more received while working with any one employer in any given month. The reporting is to be made in writing to the employer by the tenth day of the month following the receipt of tips. The employer withholds FICA (social security and (Medicare) hospital insurance) and income taxes on these reported tips and then includes the tips and wages on the employee’s W-2. If tips aren’t reported to the employer when required, the IRS can assess a penalty equal to 50% of the employee FICA on the tips.

Employees may keep records of their tips on Form 4070A and submit Form 4070 to the employer (both forms are in the IRS Publication 1244). The online version of Pub 1244, available on the IRS web site, allows the employee to enter the information on Forms 4070A and 4070 and print out the completed forms. Alternatively, electronic reporting to the employer is permitted.