Tax Tips for Tip Income
Anything you receive as a tip is considered taxable income. Usually a tip is in the form of cash. But occasionally a tip may be in the form of something that is not cash, like tickets to a concert. All tip income must be reported. To help you do so, the IRS requires people who receive tips to keep a daily record. This helps with accuracy when reporting these tips to your employer, it helps you accurately report them on your tax return and helps you with proof should your tip income ever be questioned.
It is suggested that you keep a tip diary as well as copies of any documents that show your tip income (such as restaurant bills and credit or debit card receipts). The IRS actually provides a form for this purpose. It’s Form 4070A from Publication 1244. Note, even if you use an electronic form for keeping tip records (usually from an employer) it is suggested that you keep a paper copy of the electronic document just in case.
You are also required to report your tip income to your employer. This is so your employer can withhold the proper amount of income and employment taxes from your wages. This will also allow your employer to report the proper amount of earnings when filing a copy of your W-2 with the IRS. Note, if you do not report your tip income to your employer, you may be assessed a penalty. The penalty is equal to 50% of the federal and employment taxes you owe on the unreported tip income. This is in addition to the taxes you owe on that unreported tip income.
If you have tip income that has not been reported or you have reported it, but desire to seek ways to minimize your tax obligations, then schedule your free consultation by calling (480) 888-7111 or submit a web request here.