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Do I Need to Pay Tax on My Tips?

When you work as a waiter or in other position in which you regularly receive tips, it's tempting to consider that extra cash as coming in "under the table." However, tips are income. By law, you are required to report your entire income to the IRS and pay federal taxes.

So, what do you do if you regularly receive tips at work? The first step is to set up a system to keep track of them. You can keep a paper or electronic record, but it's vital that you update it routinely.

Your employer might provide a form or an electronic record system to track your tips. You can also visit the IRS website and download form 4070A, Employee's Daily Record of Tips, to keep everything organized. Whichever method you choose, you need to record all tips received, including:

  • Cash tips
  • Charged tips (i.e. tips received via credit card, debit card, or gift card)
  • Tips received from a shared source (such as a tip-sharing pool)
  • Tips distributed by an employer

Both direct tips (tips given directly to you) and indirect tips (tips distributed to you by someone else) must be reported. Make sure that any tip record given to your employer includes:

  • Your name, address, and social security number
  • Your employer's name and address (or the establishment name if it's different from the employer's name)
  • The month or time period covered in the report
  • The total tips received during the specified time period

If you are the one distributing tips to someone else, you also need to record that information. For example, if you are a waiter and you split a tip with a bartender, you should record how much you gave to the bartender and the bartender's name under that day's tip entry. That way, you have a record of how much tip money you kept and to whom you gave the rest.

At the end of each month, you must report the total amount of tips received to your employer. This allows them to correctly calculate withholdings for Social Security, Medicare, and income tax. The only time you don't need to report tips to your employer is if you receive less than $20 in tips. 

If you don't report your tips to your employer, you are required to report them on your tax return so that the appropriate taxes can be paid. Your tax return is also where you should report the value of any non-monetary tips, such as tickets or other items that have significant value.

Navigating tip income isn't impossible, but there's a lot of information you need to be aware of. Taxation Solutions, Inc. can help you understand and abide by the tax code surrounding tip income. If you have questions about tip record keeping, tax liability, or reporting, call our team of tax professionals today!