Working for tips is hard enough. But the tax rules surrounding tips can make life even harder come tax season. Tips are optional payments that customers provide to employees—usually in the service industry. Many service industry workers falsely think that they don’t have to report their tips when they file their taxes. However, the IRS requires all tipped workers to report their extra earnings. If you are struggling to figure out how to report your tips, it could be helpful to work with a skilled tax professional. Here is some helpful information and tips on reporting your taxes.
Do I Need to Claim My Tips on My Tax Return?
Any cash and non-cash tips received as an employee are considered income and are thus subject to federal income taxes. All the following forms of tips are considered taxable by the IRS:
● Cash tips received from customers
● Tips left by customers on credit cards, debit cards, or any other electronic payment method
● Tip amounts received from other employers as a part of tip splitting or an informal tip sharing arrangement.
The only time you do not have to report tips is if the total tips you received during a single month is less than $20.
Your Responsibilities as an Employee
As a tipped employee, you have three main tax responsibilities regarding your tips. These include:
● Keeping a daily record of your tips.
● Reporting your tips to your employer—unless the total is less than $20 a month.
● Reporting all your tips on your income tax return.
Ensuring you follow these three responsibilities will ensure you don’t run into problems with the IRS.
Keeping a Daily Record of Your Tips
To keep a daily record of your tips, you can use Form 4070A. In addition to filling out this form, you’ll need to keep a record of the date and value of any noncash tips you get, which include any items of value such as tickets or passes. Although you don’t report these to your employer, you will need to report them on your tax return.
Report All Monthly Tips Totaling More than $20 to Your Employer
In accordance with the IRS, all employees must report all cash tips that total more than $20 per month. Cast tips also include any charged tips left on credit or debit cards along with tips received by other employees through a tip sharing or splitting program. There is no specific form employees are required to use for this report. However, your monthly tip statement should include the following information:
● Your signature
● Your name, address, and social security number
● Your employer’s name and address
● The month the report covers
● The total tips received during the month
Employees can use any form or document that includes these elements, such as Form 4070.
Report all tips on Your Income Tax Return
To report your tips, you’ll need to use Form 4137 to state the amount of unreported tip income to include as additional wages for your yearly income. These additional wages will be added to your Form 1040, which reports your income tax return and share of Social Security and Medicare tax owed on your tips.
Consult a Skilled Tax Resolution Attorney
If you are struggling to properly report your tipped wages on your tax return, it can be helpful to work with a skilled tax professional. Ensuring your tips are properly reported will save you from dealing with potential conflict with the IRS.
At Morgan Sebastian Law, Attorney Becky Sebastian is eager to help you navigate the complexities of your tax situation. We understand the challenges of paying taxes while experiencing financial hardship, and we are here to help you handle negotiations with the IRS. To schedule a consultation with an experienced tax resolution lawyer, call (877) 223-6605 or fill out our online contact form.