Tip Income and Taxes
Do I have to pay taxes on tips as a waiter or waitress? How do I report tip income on my tax return?
You may work as a W-2 wage earner who also receives tips for your work. Or, you may receive tips when performing work as an independent contractor. In general, any income received from any source is taxable. Learn the difference between nontaxable and taxable income. When you receive income from passive sources, such as investments or stocks, this income is also taxed.
Report Tips on Taxes
Do you need to file a tax return when your primary income is tips from work?
Generally, all tips received by a taxpayer are classified as income. Therefore, this money is subject to federal income taxes and any applicable state taxes. As a taxpayer receiving payments or a regular paycheck, you are responsible for including your taxable income as part of your gross income on your tax return. You may receive tips in a variety of ways, including:
- Tips from customers through work, whether cash, debit or credit card, electronic payment, or gift card
- Direct payment to you through cash or credit, or debit card
- Tips obtained from a tip-splitting arrangement set up by an employer, which is dispersed amongst various employees. Note: in this scenario, only report the amount you personally take home. For example, if you received $200 in tips for the night as a waiter, but gave $50 each to the bartender and busser, then you would only report $100.
When you file taxes, your tips will be reported alongside your gross income on Form 1040. Tips are often reported on your Form W-2 if you primarily earn wages as a server, customer service representative, or in another profession that receives regular tips. When you make $20 or more in tip income, these tips are reported to the employer, who will put them on the W-2, which is included in your wages in Box 1, Wages, tips, and other compensation. The tax is also calculated with this in Box 5, Medicare wages and tips, as well as Box 7, Social Security tips.
Your employer may also report amounts of additional tip income added to the tips you reported during the year. This is reported to you in Box 8, labeled Allocated Tips. This sum is not included in your amount reported in Box 1, and it may have an amount if you worked in an establishment like a restaurant that must allocate tips to employees. This also applies if your reported tips were less than your share of 8% for food and drink sales. This means that if your income is primarily made from tips, such as a food service position, then you may be entitled to additional tip income that your employer will include on your W-2. Income, Social Security, Medicare, and railroad retirement taxes are not withheld on allocated tips.
If your employer does not keep track of your tip income or you receive tips for independent or self-employment work, you would be responsible for correctly reporting your tips. To do so, taking some steps to prepare your income may be helpful. That way, you include the correct amount of tips you received during the year. Consider the following:
- Keep a daily tip record - keep a notebook or spreadsheet of tips received each shift. As you collect tips, write these down and report them on your return.
- Report your tips to an employer - if your employer is not tracking your tips and it is instead your responsibility, you may consider giving your employer details about the tips you receive. They may be able to include this on your tax form at the end of the year. If your tip income is less than $20 per month per job, you may not have to report these tips to your employer. If you work two jobs for which you receive tips, you would apply the $20 limit to each position. You also do not need to report noncash tips, such as passes or tickets, but the cash value of these items must be reported on your tax return.
- Regardless, report all tips on your income tax return - use your own data or employer's figures to report your tip income with your gross income on your return.
- Unreported tip income will need to be included on your tax return. If you did not report certain tip income to your employer, use Form 4137 to calculate Social Security and Medicare taxes on this income - eFile.com will help you fill in this form. eFileIT now.
Read the IRS publication on Reporting Tip Income for more details.
How Tip Income is Taxed
Tips are typically taxed as regular income and included in your gross income. When you receive tips in cash or debit/credit, this amount is taxed as income. However, when you receive non-cash tips, such as tickets, collectibles, passes, or other items of value, these are also to be reported as income. When you receive an item as a tip, you will need to report the fair market value of this item as income. Included in your gross income are any wages you received during the year as well as other taxable income, such as self-employment income, interest or dividends, or certain retirement withdrawals. Include tips with your gross income so your income tax can be assessed accurately.
Do I pay taxes on surcharges or auto gratuities?
In certain businesses, often restaurants, the business may include a surcharge on the bill for the customer to pay. This is an additional fee for the service of the employees of the business. Because the customer does not choose to add this nor select the amount, these are not counted as tip income and therefore are not reported to your employer by you as the employee.
What if I don't report my tip income accurately to my employer?
There are penalties if you do not report the correct amount of tip income for a given month. If you fail to report tips accurately and honestly, the IRS may impose a penalty of up to 50% of the Social Security and Medicare taxes which were not paid since you did not report the tips properly.
Have tip income? Report your tips and other tax information on eFile.com and get your taxes done easily. Compare eFile.com to TurboTax® or H&R Block® and eFileIT by Tax Day.
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