Tips, like regular income, are taxable. Be it a restaurant worker, casino employee, or limo driver, any employee who makes the majority of their income from tips, must record and report the income to the IRS. Failing to do so may force the IRS to charge the taxpayer 50 percent of their Medicare and Social Security tax as a penalty. Therefore, every tipped employee needs to understand tax laws on tips. The easiest way to do so is by speaking to a local IRS debt tax attorney in Fort worth. To give you a headstart, let us learn more about taxes on tips as an income.
What is a Tip?
Let’s first understand what type of income qualifies as a tip. Any income is a tip if:
- The payer pays it without any compulsion
- It is non-negotiable
- No employer policy has dictated the tip
- The customer has the right to decide whom to give the tip
- The customer has the right to decide the amount of the tip
Recording Tips
All employees who work in an industry where they receive tips must record and report the income to the central tax authority on a monthly basis. Whether you are a bellboy, waiter, or bartender, you need to record all the tips you receive everyday. The due date for submitting the report is the 10th of every month. Here are the details you must include in your tips report:
- Your name, address, and Social Security number
- Name and address of your employee
- Name of the month of the report
- Total tip amount
Note: Use IRS Publication 1244, Employee’s Daily Record of Tips and Report to Employer, for recording tips. If your employer does not provide an electronic system for recording tips, record your tips in a tip diary. Another way to maintain tip records is to keep copies of all the tips, including credit and debit card charge slips and hotel bills.
Service Charges are Not Tips
A few businesses include a percentage toward tips in the customer’s bills. This sort of income, in contrast to common notion, is not a tip but a service charge. Employees who receive service charges are not required to include the amount in their tips records. The income is, however, taxable, which your employer will typically mention in the W2 form.
Withholding Tips
The IRS considers tips as employee wages. When a tipped employee shares their tip report with the employer, the employer must withhold a certain amount from their wages to pay as tax to the IRS. What many taxpayers are not aware of is that tips are subject to federal income tax as well as Social Security and Medicare tax. In many cases, the tipped employee’s paycheck is not enough to withhold the required tax, as most tipped employees earn most of their income in the form of tips and not regular wages. When this happens, the taxpayer can pay cash to cover the required tax amount. If not, the withholding process moves on to the next month.
Must Read: Understanding FICA (Social Security and Medicare) Taxes
Reporting Tips
Any tipped employee must include their tips in the tip record form only if their total tips are more than $20 of cash tips in a month. Tipped employees must report all forms of tips in their tax return form, including those added to their credit cards and received directly from customers. They must record cash tips as well as non-cash tips such as passes, tickets, or any other taxable items.
Wrapping Up
It is Important to know several other facts about taxes on tips as an income. Understanding how to navigate without expert help can be difficult, as tax laws are more complicated than you may think. Moreover, each case is different, which makes hiring a fort worth tax attorney all the more important. The Law Offices of Nick Nemeth have a team who can help you understand complicated tax laws and solve all of your IRS tax issues. To schedule an appointment, call us at (972) 426-2553. For general inquiries, click here.
