Questions About Filing Taxes With Tip Income

If you’re surprised to learn that you have to pay taxes on tips, believe us, you are not alone! So, how does one go about paying taxes on tips? Read on to learn the basics:  

Is this cash a tip?Any tips, be they in the form of cash, credit or debit, need to be reported as income. There really aren't a lot of exceptions to this rule; you're pretty much obligated to report any tips collectively over $20 a month to your employer.

Do I really have to tell my boss about my tips?Yes, you do need to tell your boss about the tips you receive. If taxes are only withheld on your hourly wages, when you report your tip income on your tax return (which you have to do), you'll have a big tax bill. That's why receiving more than $20 in tips monthly must be reported to your boss. And if it is less than $20, you still have to report it in your return.

Is this free ticket to the baseball game a tip?If a regular knows you love baseball and tips you some decent box seats for the game, don't turn the tickets away. In fact, you don't even have to report it to your boss as income. It's yours to walk away with. But here's the rub: You still have to report it to the IRS. On your 1040, you'll need to add the value of any noncash tips you receive to your wages and compensation. 

Do service charges count as tips?Many restaurants include a service charge for larger parties. Basically, it's the restaurant enforcing a tip on groups. And because it's mandatory, you don't have to report it to your boss as extra income. It should be included in your wages, not as a tip. If the customer has a choice about whether to leave money or not -- or has the right to decide who to leave the payment to -- it's a tip. Otherwise, it's a service charge.

Do I have to pay taxes on allocated tips?Allocated tips are not typical, and odds are they probably don't apply to you. They're tips that your employer gives you in addition to tips you make. To make a long story short, the idea behind allocated tips is to make sure that all tips are being fairly reported. The good news? If you received allocated tips, your employer is responsible for reporting them. They'll show up in box 8 of your W-2, if you receive them.

How do I keep track of tips?The IRS, and likely any tax professional, is going to recommend you bite the bullet and actually write down any tip you get. In fact, they even have a Form 4070A to help you itemize the tips that come your way. You can keep track of your tip amounts, any tips that are paid to you by other employees in a pool and any tips you're paying others for their share of help.

What form should I fill out to report my tips?You'll report your tip income on line 7 of your return (Form 1040). And as long as you've been reporting tips to your employer, you should be able to look on your W-2, where they'll be recorded. Speaking of reporting, you can also fill out Form 4070 (not to be confused with 4070A, your tip diary.) Form 4070 simply helps you keep track of the tips you report to your employer .

Is it really so bad if I don't report my tips?Honestly, it is so bad. Remember that tips aren't just "extra" money. Tips absolutely count as your income. Not reporting income to the IRS is pretty much equals tax evasion, and the IRS is fairly well-known for making it the agency's business to punish those who evade taxes. If you don't report your tips, be prepared for some consequences.

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Kate Kershner "10 Questions When Filing Taxes With Tip Income" 30 December 2014.HowStuffWorks.com. <http://money.howstuffworks.com/personal-finance/personal-income-taxes/10-questions-when-filing-taxes-with-tip-income.htm> 22 April 2016.