If you have a job such as a waiter, taxi driver, hotel concierge, hairdresser, or delivery person where you receive tips in addition to your regular income, these tips are subject to federal income tax and need to be included in your income. Tips are voluntary and can be in the form of cash, debit or credit card, or even non-cash gifts such as concert or sporting event tickets.
Reporting tip income is simple, as long as you remember to:
Record tips daily. Documenting your tips is important for reporting your tips, both to your employer and on your income tax return. Plus, the IRS could request this information in the unlikely event of an audit.
One way to keep track of your daily tip income is to use Form 4070A from IRS Publication 1244. Ask your employer for the form or go to http://www.irs.gov/pub/irs-pdf/p1244.pdf. This form makes it easy to keep track of your cash tips, credit/debit card tips, noncash tips, and tips split with coworkers. Other recordkeeping options are to use a monthly calendar, create an Excel spreadsheet or download a mobile app. If you decide to track your tips with an app, remember to keep a paper copy of the information as well.
Report tips to your employer. Keeping a daily record of tip income makes it easy to know if you need to report tips to your employer. If your cash tip income totals $20 or more at the end of each month, you must report those tips to your employer. Your employer is then required to withhold federal income, Social Security, and Medicare taxes from this tip income. Not reporting your tip income to your employer may result in you paying a penalty.
Some employers may require you to report tips at the end of each work shift and then add them to your Form W-2; however, many employers trust employees to track tips on their own and report them when time comes.
Report tips on your tax return. All tip income you receive throughout the year must be reported on your individual income tax return. This includes your cash tips, credit/debit card tips, noncash tips, and any tips received under a tip-splitting agreement with coworkers.
Tips you reported to your employer will be included in box 1 of Form W-2 you receive from your employer. Your tips are reported on line 7 of your Form 1040.
If you did not report all your tips to your employer, you must file Form 4137, Social Security and Medicare Tax on Unreported Tip Income, with your Form 1040 tax return. Tip income is reported on Form W-2 but you can also access the Q&A for Form 4137 in TaxAct by going to the Federal Quick Q&A, expanding the Other Income category, and selecting Taxes on tip income.
Don't waste all that hard work, friendliness, and loyalty it took to earn those tips by failing to report them properly. Your boss (and the IRS) will surely appreciate it.