If you work as a restaurant server, hostess, or in another industry where you rely on tips as your primary source of wages, you need to make sure you’re reporting your tip income accurately to the IRS.
The IRS needs to know about all of your income sources – whether the tips come in the form of cash, gifts, tickets, or another item of value – and you must report the value of all non-cash items as income on your income tax return.
Ultimately, non-cash items are subject to tax because you have “earned” them through your line of work.
Here are four quick tax tips the IRS wants you to understand regarding your tip income:
All types of tips are taxable
Whether you’re receiving cash tips from waiting tables or non-cash tips in the form of tickets, passes, or gifts from another profession, the total cash value of all of these tips are subject to federal income tax, Social Security tax, and Medicare taxes. You need to be very good at reporting the fair market value of all non-cash tips and will need to be prepared to pay taxes on all of these tip sources.
Include all types of tips received
You need to include all cash tips received from customers, tips added to credit cards, and any tips you received under a tip-splitting arrangement from fellow employees at your place of work. All of these tips count as gross income.
Report all of your tips to your employer
You have to be honest about the total amount of tips you received during each shift. If you earned $20 or more in tips in any given month, you will need to report all of that income to your employer. Your employer will then go ahead and withhold federal income taxes, Social Security taxes, and Medicare taxes. These amounts will also be reported to the IRS.
Keep an accurate log of all tip income
It’s convenient and simple to use IRS Publication 1244, Employee’s Daily Record of Tips and Report To Employer, to keep good track of all your tip income. Just get into the habit of recording your tips daily so that your daily records always match what your employer has on file.
Failing to report your tip income or falsifying this income is illegal. You are required, by law, to pay taxes on all sources of income and could be facing an audit – and some serious penalties – if you don’t file your tax return accurately or disclose your true income.