Tips can be earned as cash provided by a customer, from a tip-sharing program at a restaurant, or as a gratuity left on a credit card. Many American workers rely on tips as a sizable portion of their income, yet many are unaware of how to properly report their tip earnings. Tip reporting laws can be a challenge to navigate. Usually, employees who receive gratuities from their customers must report their earnings to their employers on IRS Form 4070. If you are facing tax troubles as a result of failing to report your tips, you should consult with a skilled tax resolution lawyer. Outlined below is helpful information workers can use to navigate the tip reporting process.
The Difference Between Tips and Service Charges
Since tips are a form of income, they are taxable by the IRS. However, it is important to know what constitutes a tip, as some gratuities are classified by the IRS as “regular wages.” For example, one notable difference in gratuity classifications is that of tips and service charges.
Tips include the cash that customers leave for their service, any gratuity that is left on a credit or debit bill, and any money that is collected through a tip-sharing program. Conversely, service charges are fees that are added to a bill that the customer does not control, such as an automatic gratuity for large parties or a delivery fee.
The IRS classifies service fees as regular wages, which means that you’ll probably see the income from these fees on your paycheck rather than at the end of a shift.
Keep a Detailed Record of All Your Tips
If tips are a part of your wages, it is important to keep a detailed record of the tips you receive every day. This is especially important for employees who are a part of a tip-sharing program. For example, even if you collected $80 in tips as a server, you may have to allocate some of that money to a busser or hostess. If you have to share your tips with other employees, it is important to keep track of your net tip earnings.
Report Your Tips Every Month
The IRS requires workers who earn more than $20 in tips a month to report their tips on a monthly basis. Using IRS Form 4070, workers can report their earnings—if over $20—to their employers by the 10th of every month. For example, if you earned $600 in tips in March, you would need to report these earnings by the 10th of April.
It is important to note that you give this form to your employer, not the IRS. When you give the form to your employer, they will calculate the amount of payroll tax to withhold from your paycheck.
What Happens If I Choose Not to Report my Tips?
Many workers choose not to report their tips—especially cash ones. While cash tips don’t leave the same paper trail as the tips left on credit cards, choosing not to report them could still have long-term consequences. When you don’t report your tips in their entirety, the Social Security Administration can’t properly calculate your annual earnings, which can affect the size of your government benefits when you retire.
Consult a Skilled Tax Resolution Lawyer
If you are facing tax troubles as a result of failing to report your tips properly, it is important to consult with a skilled tax resolution lawyer. At Morgan Sebastian Law, we’re eager to confront all the complexities of your tax issues. When you work with Attorney Becky Sebastian, you will experience compassionate attention that provides a sense of relief and peace of mind regarding your financial state.
To schedule a consultation with an experienced tax resolution lawyer, call (877) 223-6605 or fill out our online contact form.