The Internal Revenue Service (IRS) requires all employees in the U.S. to claim additional incomes above salaries and hourly wages, including tips. Business owners are expected to abide by this law and see that it is enforced.
According to IRS.gov, employees that receive tips as a percentage of their incomes are obligated to report those tips on a Form 4070 supplied by their employers. These reports are due each month on the 10th and must be signed by the employee, making sure the social security, name, address and amount is correct before releasing to the employer.
For business owners whose staff primarily earn tips, they are obligated by the IRS to report at least 8 percent of their daily sales receipts as tips. If an employee claims less than 8 percent of his sales for a certain period, the employer must allocate the difference.
Because employers are required to deduct income taxes, social security and medicare on income, including tips earned, they have the right to take these out, regardless if tips are claimed, according to IRS.gov. If an employee fails to claim the appropriate amount, their employer in many cases will deduct from their hourly rate the amount to cover these taxes.