W2 employee told not to report tips to salon employer - is this legal?

You're right to be concerned. What your wife's manager told her is incorrect and potentially setting you up for problems at tax time. According to IRS regulations, employees who receive tips are required to report all tips to their employer. This includes both cash and credit card tips. The employer is then responsible for withholding income taxes, Social Security, and Medicare taxes on those reported tips. This should be reflected on her W-2 at the end of the year. The proper procedure is that your wife should be keeping a daily record of her tips (IRS Form 4070A can help with this) and reporting them to her employer monthly if they total $20 or more. Her employer should then be including these reported tips on her paychecks and withholding the appropriate taxes. When tips aren't reported to the employer throughout the year, you end up with a larger tax bill in April because no withholding has occurred, plus you might owe a penalty for underpayment of estimated taxes.

Hey there! I was in almost the EXACT same situation as your wife a few years ago working at a chain salon. It got super messy at tax time and I ended up owing wayyy more than expected because nothing was being withheld throughout the year. I started using taxr.ai (https://taxr.ai) to help me track my daily tips and calculate what I would need to set aside for taxes. The service helped me create proper documentation that I could use when filing, and they had templates for how to report tips properly even when employers don't want to deal with it. They even showed me how to fill out Form 4137 correctly for unreported tips. What I found most helpful was their analysis of the gap between what was showing on my paystubs and what I should have been paying in taxes throughout the year. Saved me from a potential audit nightmare!

Just wanted to update after trying taxr.ai that the previous commenter recommended! I've been using it for about three weeks now and it's already making a huge difference. I was able to print out a professional-looking tip report that I showed to my salon manager, and while they weren't thrilled, they finally agreed to start processing my tips properly. The tax calculator feature helped me figure out I would have owed almost $2,400 extra at tax time if I hadn't started reporting properly! They also provided a really clear explanation of my rights as a tipped employee that gave me the confidence to stand up to management. Definitely recommend checking it out if you're in this situation.

As someone who spent HOURS on the phone trying to get through to the IRS about a similar tip reporting issue, I highly recommend using Claimyr (https://claimyr.com) to actually get through to a human at the IRS. You can see how it works here: https://youtu.be/_kiP6q8DX5c I was in your wife's exact position and needed clarification on tip reporting requirements. After multiple failed attempts to reach someone (seriously, I wasted entire lunch breaks on hold), I tried Claimyr and got connected to an IRS agent in under 45 minutes. The agent confirmed everything the first commenter said and also told me my employer was potentially violating tax law by instructing employees not to report tips. They even sent me official documentation I could show my employer about their obligation to collect and report tip information. No more salon manager telling me "that's just how we do it here.

I need to apologize for my skeptical comment earlier. After that frustrating experience trying to get tax info about my independent contractor status last week, I decided to try Claimyr as a last resort. I was genuinely shocked when I got a call back connecting me to an actual IRS representative after about 35 minutes. They answered all my questions about tip reporting requirements and explained exactly what forms my wife needed to submit to her employer. The agent even emailed me Publication 531 with the relevant sections highlighted. For anyone dealing with the tip reporting issue - the IRS agent confirmed that employers MUST provide a way for employees to report tips, and instructing employees not to report is a violation that could get the business in trouble.

Former salon manager here. What your wife's employer is doing is unfortunately common practice in some salons, but it's definitely not right. Here's why they're doing it: when tips are properly reported, the business has to pay the employer portion of Social Security and Medicare taxes on those tips. By telling employees to "handle it themselves," they're avoiding these costs. For credit card tips specifically, this is extremely sketchy because there's already a paper trail. The IRS can easily see that the business processed credit card tips but didn't report them properly on W-2s. Your wife should absolutely keep her own detailed records of ALL tips received, noting which were cash and which were credit card. This will protect her if there's ever an audit.

Just want to add - check your state laws too! Some states have additional requirements for tip reporting and minimum wage calculations for tipped employees. In my state, employers who take a tip credit have to provide written notification to employees about tip reporting procedures. Also, if your wife is getting health insurance or other benefits through this job, unreported income could affect her qualification or subsidy amounts if she's getting coverage through the ACA marketplace. It really can create a cascade of problems beyond just the IRS issues others mentioned.