Do the tips that I receive from customers have to be reported as taxable income? It can be confusing to know which income is taxable and which is not.
The IRS has a comprehensive guide on what types of tips are considered taxable income and what is not.
Are tips taxable? In general, yes, any tip that you receive in connection with your job is considered taxable income. This includes tips received directly from customers, as well as tips received from other employees.
However, there are some exceptions to this rule, such as tips received for services performed outside of your regular job duties. For more information, consult the IRS Publication 531, Reporting Tip Income.
Are Tips Taxable?
Tipping is a popular custom in the United States. The IRS (Internal Revenue Service) defines a tip as “money given to an employee by a customer or other third party, and it may be in the form of cash, credit, debit card payment, food, drink or any other item.”
Tips are considered taxable income and must be reported. Cash tips received by an employee in any given month are subject to social security and Medicare taxes and must be reported to the employer.
Tips that are not considered taxable income include, but are not limited to:
• Tips received from your spouse.
• Tips received by an independent contractor who is contracting with the restaurant. For example, if you are a graphic designer and have contracted with a local pizza parlor to create advertising materials, any tips you receive for delivering those materials are not taxable.
• Tips received by a corporation or other business entity for food and beverages consumed on the premises of the establishment.
• Tips from other employees, if you are an employee acting as a tip pool supervisor.
• Any tips that you have reported to your employer as income.
Calculating Taxes On Tips
Employees who earn cash gratuities of $20 or more in a month while working for you are required to disclose the total amount of tips they receive. Employees must submit written reports by the tenth day of the following month to comply with this regulation.
Employees who earn small tips (less than $20 per month) are not required to give you information, but they must disclose these amounts on their tax return and pay taxes if any are due.
Tipped employees must report tips received from customers, tips provided through any tip-sharing arrangement, and charged tips (for example, credit and debit card charges) they distribute to the employee.
Both directly and indirectly tipped workers are required to provide their employer with information on how much they make in addition to any other withholdings.
When a customer pays an employee directly, any service charges added to the bill or set by the employer that the client must pay are not considered tips but rather non-tip compensation. These non-tip earnings are subject to social security tax, Medicare tax, and income tax withholding.
Furthermore, the employer can’t take these non-tip earnings into account when computing employers’ tax credits under section 45B of the Internal Revenue Code because they are not tips.
Tips are sometimes excluded from employees’ paychecks. But, despite what you might have heard, this is not the same as not having to report them as income. It’s true that these payments don’t reduce your salary on paper, but they must still be reported as taxable income on Form W-2 (PDF).
How To File Tips On Your Federal Taxes?
The following are the ways in which you can file your tips:
In most cases, you must disclose the tips credited to you by your employer on your income tax return.
Attach Form 4137, Social Security and Medicare Tax on Unreported Tip Income, to Form 1040 or 1040-SR, U.S.
To report tips allocated by your employer (in Box 8 of Form W-2), fill out a Tip Income Tax Return, which is similar to an IRS 1040EZ.
Additional tips not furnished to the employer must also be reported on Form 4137. If you have adequate records to show that you received fewer tips in the year than your allocated amount, you do not need to report tips allocated to you by your employer on your federal income tax return.
If your employer doesn’t have their own tip reporting form, you may use Form 4070, Employee’s Report of Tips to Employer.
Your employer will determine and take out income and payroll taxes from your wage after you report your monthly tips.
For example, you provided your employer $2,500 in tips during June and your total hourly earnings for June were $500. Your employer will deduct payroll taxes of $3,000 from the check you’ll receive after calculating wage taxes on the entire sum.
If the taxes you owe exceed your payment, however, you may need to make estimated payments to the IRS in order not to incur an underpayments penalty.
State Taxes On Tips
Tips are taxable income to you in the same way as an hourly wage or a yearly stipend would be. They are subject to federal income tax, Social Security payroll tax, and Medicare premium payments. If you live in a state with an income tax, your tips will also be taxed by that state.
Conclusion
Conclusion paragraph: Do you know the ins and outs of tipping? Tips are a popular custom in the United States, but many people are unsure of what is considered a tip, how much to tip, and when to tip. The IRS defines a tip as “money given to an employee by a customer or other third party, and it may be in the form of cash, credit, debit card payment, food, drink or any other item.”
Tips are considered taxable income and must be reported. In this article we’ve outlined the taxable nature of tips and why it’s important to report your tips. Be sure to report your tips on your annual tax return, and enjoy knowing that you’re helping to make someone’s day a little bit brighter. Hope this information will help clear up some of the confusion around tipping etiquette.