Are you reporting yours?
While tipping is not mandatory in most of the U.S., it is often expected in many circumstances when services are provided. The tip income from services—whether cash or included in a charge—is taxable income. As taxable income, these tips are subject to federal income, social security and Medicare taxes, and may be subject to state income tax as well.
If you received $20 or more in tips in any one month, you should report all your tips to your employer; however, all tips are taxable income and should be reported on your tax return. Also, you should maintain records of your tip income. The IRS provides Publication 1244, Employee’s Daily Record of Tips and Report to Employer, for an audit-proof record.
Beginning January 1, 2014, the IRS defines tips as follows:
- The gratuity must be made free from compulsion;
- The customer must have the unrestricted right to determine the amount;
- The gratuity should not be the subject of negotiation or dictated by employer policy; and
- Generally, the customer has the right to determine who receives the gratuity.
From now on, the IRS will treat automatic gratuities on restaurant bills as wages and not tips. Automatic gratuities are often placed on bills of large parties to prevent under-tipping. The IRS views this as the latest step in the effort to prevent underreporting of tip income.