IRS Reminds Taxpayers that Tips are Taxable Income

Workers have returned to the service industry lately—in droves. With the threat of coronavirus subsiding in many locations, restaurants and other establishments have sprung back to life.

With the surge in employment, we thought it appropriate to remind workers throughout the service industry there’s one phrase they should never forget: Tips are taxable income.

Anyone who works in the service industry—or has a side hustle in the gig economy—needs to keep that advice front and center come tax time. The point is taxpayers need to understand their obligations that come along with the tips they earn, so they don’t get a nasty surprise when they file.

Straight talk on tips

We’ll say it again: all tips a taxpayer receives must be reported as income. This includes tips that come directly from customers; tips that are added using credit, debit or even gift cards; and tips that come from a tip-splitting arrangement with fellow employees.

And don’t think those two tickets to the concert that your last customer gave you are not fair game—they are. Non-cash tips are income and subject to tax, just as if they were cash.

The Internal Revenue Service says three good habits can keep taxpayers out of hot water with their tips.

First, keep a daily record of tips received. This gives taxpayers hard numbers they can report to the IRS and avoid guessing later.

Second, report all tips to the employer. Simple enough.

Third, report all tips on the taxpayer’s tip record on their income tax return.

If taxpayers have questions about whether their tips really are taxable, they can consult the Interactive Tax Assistant on the IRS website for help.

Employers should remember that any employee who receives more than $20 in tips in any month has to report that month’s tips to the employer. The report has to be made by the 10th day of the following month.

For example, if a waiter gets $25 in tips during November, he has to report his total tips for that month by December 10.

Since the employer is required to withhold federal income, Social Security and Medicare taxes on the reported tips, it’s vital that the employee makes the monthly report on time.

For more information on tips and how to report them, see these resources from the IRS:

Source: IRS Tax Tip 2022-23

Story provided by TaxingSubjects.com