Aside from regular wages, many taxpayers have jobs where they get tips from their clients or customers. Generally, income received as a tip is taxable. Here’s some information to help taxpayers correctly report the income they receive as a tip:
Use the Interactive Tax Assistant.
This tool on IRS.gov asks taxpayers a series of
questions. After the taxpayer answers the questions, the tool gives responses
based on the answers. Taxpayers can use the Interactive Tax Assistant to find
out if their tip income is taxable.
Show all tips on a tax return.
Taxpayers use Form 4137, Social Security and Medicare Tax on
Unreported Tip Income, to report the amount of any unreported tip income. This
form allows the taxpayer to include it as additional wages. This includes the
value of non-cash things someone receives as a tip, such as tickets or passes
to an event.
Report all types of tips.
Taxpayers must pay tax on all tips received during the year, including those:
- Directly from customers.
- Added to credit cards.
- From a tip-splitting agreement with other employees.
Report tips to an employer.
Employees who receive $20 or more in tips in any month must report their tips
for that month to their employer. They must do so by the 10th day of the next
month. When reporting tips, the employee should include cash, check and credit
card tips they received. The employer must withhold federal income, Social
Security and Medicare taxes on these reported tips.
Keep a daily log of tips.
Taxpayers use Publication 1244, Employee’s Daily Record of Tips
and Report to Employer, to record tips. This will help report the correct
amount of tips on their tax return.
