Taxation & Estate Planning

I work for Tips - Do I have to Report that Income??

By Darrin Mish

If you work in a service-oriented field such as food servers, hairdressers, valets, baggage handlers, and hotel maids, you more than likely receive tips. These tips are considered income and need to be reported as such. If you have not been reporting your tips, you have created an IRS Problem. If you have not been recording your tips and your employer has not been getting these figures, your IRS Problems need to be resolved.
What Do I Need to Do?
If you receive $20 or more in tips per month from one job, this must be reported to your employer by the 10th of the next month. Your employer will withhold federal income tax, social security, and Medicare taxes or railroad retirement tax on your tips. Tips will be included as part of your wages on your W-2 form. Only cash, checks, or credit card tips need to be reported. Tips can come directly from your customers, from customer?s charges that your employer pays you, and from shared tips with fellow employees.
If you receive non-cash tips they are also considered income and subject to federal income tax. These would include tickets, passes or other items of value.
If you fail to report your tips to your employer, they must be reported as income on your tax return. Use Form 4137 (Social Security and Medicare Tax On Unreported Tip Income) and attach it to your return. Be aware that a penalty may be assessed.
If your tips add up to less than $20 in one month from one job, it is not necessary to report them to your employer. You do need to include them in your income when you file your return.
If it is found that you have underreported your tax income, the IRS will use your employer?s records to assess the tax you owe. You may end up owing more taxes and accruing both penalties and interest.
The IRS has helpful publications that will answer your questions regarding tips. Check these out on the IRS website, www.irs.gov:
? Publication 531, Reporting Tip Income
? Publication 1244, Employee?s Daily Record of Tips and Report to Employer which includes Form 4070A (Employee?s Daily Record of Tips to Employer and Form 4070 (Employee?s Report of Tips to Employer)
? Publication 1872, Tips on Tips ? A Guide to Tip Income Reporting for Employees in the Food and Beverage Industry
? Tax Topic 402, Tips
Our office can help answer your questions regarding tips or other questions concerning IRS Problems. Contact us today at (888) 438-6474.

Full post as published by IRS Problem Solver Blog on January 23, 2008 (boomark / email).