Rev. Rul. 66-190

Advice has been requested regarding the proper method of computing the amount of income tax to withhold from an employee who receives both regular wages and tips.

Under section 6053(a) of the Internal Revenue Code of 1954, an employee who receives cash tips amounting to $20 or more in any calendar month after 1965, in the course of his employment by an employer, must report the tips to the employer by furnishing one or more written statements not later than the 10th day following the month of receipt. Tips so reported in a written statement are deemed under section 3401(f) of the Code to be paid to the employee at the time the written statement is furnished to the employer. The employer must withhold income tax on the reported tips to the extent that he can do so before the close of the calendar year in which the written statement is furnished. The amount of income tax to be withheld at any time should not exceed the amount which remains after the employee taxes under the Federal Insurance Contributions Act are deducted from wages of the employee (other than tips) under the employer's control or from other funds made available for this purpose by the employee.

If an employee reports tips received in the course of an employment in which he also receives regular wages, the amount of income tax to be withheld on the tips should be determined by the employer as if the amount of tips reported by the employee in each written statement were a supplemental wage payment. Under section 31.3402(g)-1 of the Employment Tax Regulations, the amount of income tax to be withheld from a supplemental wage payment depends, in part, on whether income tax has been withheld from the employee's regular wages. See Treasury Decision 6882, C.B. 1966-1, 244.

If the employer has withheld income tax from the employee's regular wages, the employer may choose either of two methods of computing the income tax to withhold on the tips, as follows:

Method a. The employer may withhold on the tips at the flat percentage rate of 20 percent, without allowance for any withholding exemption.

Method b. ( Step 1 ) The employer may add the amount of tips to the amount of regular wages paid or to be paid in the same calendar year either for the last preceding payroll period or for the current payroll period. ( Step 2 ) The employer then determines how much income tax would be withheld if the sum of these two amounts were a single payment. ( Step 3 ) From the amount of income tax so determined the employer subtracts any amount of income tax withheld or to be withheld from the regular wage payment. The remainder is the amount of income tax to withhold on the tips.

If the employer has not withheld income tax from the employee's regular wages, the amount to be withheld on the tips may not be computed at the flat percentage rate of 20 percent. Instead, the employer must use Method b, as described in the preceding paragraph. The use of that method will insure that the employee receives the full benefit of the withholding exemptions claimed on Form W-4, Employee's Withholding Exemption Certificate.

¹ Also released as Technical Information Release 823, dated June 15, 1966.