It’s the season of tax returns and many rip their hair out at the thought of filing their taxes. To help, we are here to answer your tax queries. If you are in the hotel management industry or wait tables at a restaurant, then you must have one big question looming over your head: Are tips taxable? The short answer is yes. Tips are taxable even though they aren’t your fixed monthly salary.
Tips you receive in the form of cash are also taxable income. If you are earning more than $20 in tax, you have to report it to your employer. When filing taxes, you will have to use IRS Form 4070 to mention your last month’s tips during the 10th of the current month.
Do you have to report cash tips to the IRS?
Tips are income. If you receive tips in the form of debit or credit card transactions, that’s also taxable. If you receive tips from your employer or some other employer shares their tips with you, that’s also taxable. On the other hand, the service charges that the customers pay are directly added to their bills. That’s why these service charges aren’t tips and the IRS takes them as regular wages. You will receive these service charges on your payday, unlike tips that you receive every day. Some service charges include:
- Room service charges
- Service charges on water bottles
- Delivery charges
Keep careful records
- Make sure you keep a record of every tip you receive in the form of cash or bank transactions.
- If you were asked to share your tips with the busboy, cook or bartender, then deduct their share of the tip and count only the amount you have taken.
- If you don’t know how to track your record, you can use the IRS Form 4070A.
Tally and report every month
- If your tips exceed $20, then you will have to report it to your employer with the help of IRS Form 4070. Submit this form by the 10th of every month. If the 10th is a weekend or a holiday, you can report it a day prior or the day after.
- It’s important to note that you don’t have to submit this form to the IRS. You can give it to your employer who will calculate how much tax you owe the IRS and they will withhold that money from your paycheck.
- Sometimes you will be asked by your employer to report your tips income more than once a month.
- All the reporting information takes place digitally. The paper version you submit to your employer is a proof of your income in tips and this paper version acts as a backstop.
Know how the math works
- Tips are usually given hourly or based on the number of tables waited on during an evening. Some get them at the end of their shift.
- These tips are invisible unless the worker makes it a point to report it to their employer. The employer will ask the worker to fill out Form 4070 to report the same. From there, the employer will calculate and withhold the tax owed from their paycheck.
- Sometimes the tax you owe won’t be covered by tips. The tax is high and you will have to ask your employer to withhold money from your next paycheck.
- You can pay the money you owe them the next month to avoid tax penalties. If you don’t, you will be slapped with another tax penalty for tax underpayment.
When you are filing taxes again, do report your tips
During the tax season, your employer will ask you to file the W-2 form that shows how much you’ve earned throughout the year. Along with this, mention how much you were tipped. This will reach the IRS and they will calculate how much money you owe them. When filing Form 1040, you need to report tips that are less than $20.
What happens when you don’t report your tips?
Many people try to avoid reporting their tips. This is a big mistake. While cash may go invisible and not leave a trace, the tips you receive on your debit and credit cards leave a paper trail and the IRS will haunt you once they track down your tax evasion.
Furthermore, if you decide to not report them, this may affect how the Social Security Administration views you. This can affect the benefits you are eligible to receive now and after your retirement.
How to catch up on unreported taxes
If you have evaded taxes for a year, then Form 4137 will come to your rescue. It will allow you to report all the missed and overlooked tips.
On the downside, along with the taxes you owe the IRS, you will be charged with a 50% penalty on the Social Security and Medicare taxes you owe. You can avoid this penalty in the Form 4137 by mentioning that the reason for this tax evasion is a reasonable one. The IRS will forgive your penalty if they find your reason convincing enough.
File with Line
File your taxes with Line. Estimate your Federal and State taxes for free. Enjoy hassle-free tax filing with our 100% accuracy and get the maximum refund. Get started now.