Taxes on Tips: Guidelines to Avoid IRS Troubles

April 4, 2011 | By: TaxCure Staff

taxes on tipsThere are many ways in which employees receive compensation for work performed. You may receive a paycheck from your boss, have money deposited directly into your checking account, or get paid cash. Regardless of how you receive your money, the IRS expects these earnings to be reported as income. This includes workers employed in occupations that normally receive tips. The IRS considers “tip money” as taxable income and as such has established a system to ensure employers and their workers are reporting compensation received in the form of a tip. Here we answer frequently asked questions regarding how tips are taxed.

Who has to report tip money?

Anyone who receives tips as part of their compensation for work performed must report these earnings. Both cash and non-cash tips are considered taxable income, subject to federal, Medicare and Social Security taxes. If you participate in tip-splitting or tip-sharing, you must report the amount of tips you personally received, not the total amount received. Any tips paid via a debit or credit card must also be included.

How is tip money reported?

Your employer is required to withhold applicable taxes from employees who receive $20 or more in tips per month. If you fall within this category, you must report how much money you have earned to your employer. Employees must provide their employer with the total amount of tips received in a month by the 10th day of the next month. For example, the total amount of tip money received for the month of January must be reported to your employer by the 10th day in February. When the 10th is a Saturday, Sunday, or legal holiday, you have until the next day that is not a Saturday, Sunday, or legal holiday to supply the report. In addition to reporting monthly tip income to your employer for withholding purposes, the total annual income received via tips must be reported when you file your federal tax return.
What happens if I don’t report tip money?

Employees who fail to report tip money as required could be slapped with a penalty which equals up to 50% of the taxes owed. This amount is in addition to the actual amount of tax which you will be required to pay.

How do I keep track of tip money?

Understanding the importance of reporting tip money earned, you may be wondering how to accurately keep track of tips received. Many of the jobs where tips are commonly received are also fast-paced on-your-feet jobs. The best way to keep track of all tips received is by using a daily tip record. By recording your tips at the end of each day, you are less likely to forget how much money was received or in what form. For tax purposes and your own personal records, Form 4070A is available by request from the IRS. Employees can also ask their employer for Publication 1244 which includes a year’s supply of Form 4070A. The use of Form 4070A and Publication 1244 are not required by law, however, they are very beneficial in helping works track the number of tips received. If you choose not to use these documents, you will still be required to record and report any tip money received.