We’re just going to get down to brass tacks here: the IRS wants you to report ALL of your income. That means all of your tips – cash and credit card. Whether you already know this or not, there are some things that the IRS requires of tipped employees and their employers that you may not know.
Tips, according to the IRS include:
- Cash tips received directly from customers.
- Tips from customers who leave a tip through electronic settlement or payment. This includes a credit card, debit card, gift card, or any other electronic payment method.
- The value of any noncash tips, such as tickets, or other items of value.
- Tip amounts received from other employees paid out through tip pools or tip splitting, or other formal or informal tip sharing arrangement.
You should be keeping a daily record of your tips
The IRS requires that you keep a daily record that shows the amount of cash and credit card tips you received. You must also keep a record of the amount of tips you paid to other employees, with whom you share tips (bussers, bartenders, hosts, etc.).
This will ensure that you:
- Report tips correctly to your employer for withholding
- Report your tips accurately on your tax return
- Have proof of income if your return is ever questioned
The IRS even has a form for this! Form 1070A
You are required to report all tips to your employer once a month
If you receive more than $20 in tips per month, you are required to report those tips to your employer. For most hospitality workers, you are asked to report your tips on a shift by shift basis either when you settle up to “cash out” at the end of your shift, or when you clock out at the end of your shift. A lot of employees will just leave the amount of credit card tips already reported in the system and not report their cash tips. If you do this, you should know that you are required to report both cash and credit card tips.
The tips reported to your employer are for withholding purposes. Your employer takes the tips reported and deducts the appropriate amount of tax from your regular wages for income tax, social security tax, and Medicare tax.
If your employer does not have a process for reporting income through tips, you are required to report tips to your employer on your own by the 10th of the month after the month you receive the tips. You report these using Form 4070. You will still need to keep track of the tips you pay out to tip shared employees so that you can subtract the amount you paid out before reporting.
The IRS assumes 8%
Employers and employees should know that the IRS assumes that tipped employees generate at least 8% of total allocated receipts (non-allocated receipts are not figured into this portion and include sales for carry out or any other sales that are not tipped). This number is very important for employers who are required to report total tip income (Allocated Tips) each pay period.
If the total reported is less than 8%, your employer must allocate the difference between the actual tip income reported and 8% of gross receipts. For example: Alice had monthly gross receipts in the amount of $7,200. She reported that she received $396 as actual tip income for the month. Her employer is required to report at least 8% for tip income on the gross receipts or $576 ($7,200 x 8%). Since Alice only reported $396 in tip income her employer must allocate an additional $180 in tip income to meet the minimum 8% required by the IRS.
You must also report all tips to the IRS
Reporting your tips to your employer does not cover you come tax time. The tips you report are for withholding purposes. You must also include all tips, including tips not reported to your employer, as wages on your income tax return. This is where keeping a daily record comes in handy.
You might owe the IRS if…
If the amount you earned in wages paid to you by your employer, was not enough to cover your withholding. Underpaying the IRS could also result in tax penalties when you file.
The IRS knows that lines are often blurred when it comes to reporting tips. It’s always best to keep track of your income in the event of an audit. If you have not yet filed your tax return, or have questions, come see us at Peoples Tax and be sure to check out our Special Offers if you are a new client.