If you work as a waiter/waitress or in any type of service job where tips are a major part of your income, you WILL be taxed on them. Even if you receive them in cash, the IRS has a way of calculating your tips based on your hours worked. This is known as an “allocated” tip.
There are some exceptions, but here’s some tips from the IRS themselves:
1) Tips are subject to federal, Social Security and Medicare taxes. This includes “non-cash” tips such as tickets or prizes which have a cash value.
2) Tips received both in cash and from credit card transactions, whether they are direct or through a “tip-jar” where you split the total tips with fellow servers.
3) If you receive more than $20 in any one month, you should report these tips to your employer for tax purposes. This way you can have your taxes withheld and either get a refund or lessen your balance due at the end of the year.
4) You should keep a log of your tips. The IRS provides Publication 1244, Employee’s Daily Record of Tips and Report to Employer for you to keep this log.
Keep in mind that there is no way for the IRS to know exactly how much you received in tips, however, an easy way to trigger an audit is to not report ANY tip income. Is it worth the money, time and hassle of an audit to save a few dollars on your taxes?
If you work a service job and depend on tips to make a living, please contact us and we will steer you in the right direction so that you will not have to pay more taxes than you should.