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It’s Taxable: Report Your Tip Money as Income

Tax Planning

Updated for tax year 2017

Smiling waitress taking an order in café

If you work at a job where you normally receive tips, you understand how that money can quickly become an important part of your income.

However, according to the Internal Revenue Service (IRS), tip money is also taxable. For that reason, it’s important to know how the IRS expects you to report tip income, so you don’t get a surprise tax bill at the end of the year.

Here’s what you should know.

You are required to report your tips to your employer.

Whenever you receive more than $20 per month in tip income, you must report the amount to your employer. This includes tips from cash and credit cards. Use Form 4070, Employee’s Report of Tips to Employer, to mark down the amount. Give the form to your employer by the 10th day of the month following the month you received the tips.

Your employer will report that taxable “tip income” on your Form W-2, Wage and Tax Statement, to the IRS. A copy of this form is also sent to you at the end of the year.

Additionally, your employer withholds income tax as well as Social Security and Medicare taxes from that extra money.

You may have to pay tax on more tip income than you reported.

If the total tip money reported from employees is less than 8 percent of gross sales, the IRS generally assumes not all tips were reported. When this happens, the IRS often requires your employer to allocate the unreported tip income among their employees.

Any tip money allocated by your employer is listed on your Form W-2 in Box 8 called “Allocated Tips”.

If you can prove you received less than your employer allocated, report the lesser amount on your tax return. To show you received less, you must maintain a daily record or provide other reliable evidence. That’s why it’s critical to keep an accurate record of your tip money all year long.

You may owe Social Security and Medicare taxes on unreported tip income.

The IRS requires you to pay Social Security and Medicare tax on any unreported or allocated tip money. Calculate the tax on Form 4137, Social Security and Medicare Tax on Unreported Tip Income.

Bottom line: Keep good records of your tips.

The best way to stay on top of your tip income is to keep a daily log. Any day you receive tips, simply write the amount down in a journal or create an electronic file.

Being diligent about your record-keeping makes calculating your income tax as well as any Social Security and Medicare tax much easier. And, if you utilize online DIY tax solutions like TaxAct, simply answer a few questions and the program will do the calculations for you.

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