In this gig economy, more taxpayers than ever before are receiving tip income. Whether the tips are from waiting tables, driving for Uber, or making home deliveries, those tips are considered taxable income. However, there is a lot of confusion over how to report tip income, what is the threshold for reporting and who should report it. Here is all you need to know about reporting tip income.
How Does the IRS Regard Tips?
Tips are considered regular income by the IRS. The IRS categorizes the following types of income as tips:
- Cash tips directly from customers
- Electronic tips through credit card, debit card and gift card payments
- Non-cash tips, such as tickets and other valuable items
- Tips paid out as disbursements from a tip “pool”
All tips in any form noted above are required to be reported as regular income, and they are taxable as such.
What Are The IRS Regulations Regarding Tips?
It may come as a surprise to some, but the IRS actually stipulates that anyone who regularly receives tips in the course of their employment must keep a daily record of tips received. The method of keeping the record is up to the taxpayer.
Another IRS regulation has to do with reporting to the employer. The taxpayer who receives tips must report those earnings to the employer by the 10th of the following month in which the tips were received. For instance, if you earned $1,200 in tips in January, you must report that figure to your employer by February 10th, or on the next business day. There is a specific IRS form for reporting tips to employers, Form 4070, available in Publication 1244. Alternatively, the employer may provide another form—hard copy or digital—for employees to report tips. Furthermore, an employer may, at their discretion, require that an employee report their tips to the employer more than once a month, but not less than once a month.
Tips totaling less than $20 in any month need not be reported. However, for the sake of consistency, if a taxpayer routinely reports tips on a month basis, it may behoove them to report something in every month, even if the total is less than $20. Otherwise, this may raise a red flag and look like an oversight rather than a choice.
Clever Ways to Keep Track of Cash Tip Income
If you have a job where you get tips every shift you work, it can quickly become tedious to try and keep track of all your tips; especially if you get cash tips. Yet, it’s important that you do so. You can incur serious and costly IRS penalties if they determine that you have not been accurately reporting your tip income. It’s definitely worth it to come up with a tip tracking system that works for you. Here are some clever ways to keep track of tip income.
Keeping Track of Waiter Tips
If you wait tables for a living, it’s likely that you wear some kind of apron or other uniform apparel with pockets. An easy way to keep track of cash tips. Simply designate one pocket for all your tip earnings; don’t keep anything else in that pocket. At the end of the night, just add up all the bills and coins and record them in a little notebook, along with the date. The notebook will serve as proof should the IRS ever decide to question the accuracy of your cash tips reporting.
Keeping Track of Driver Tips
If you work for Uber, Lyft or drive a limousine service, cab, airport shuttle or work in some other driving capacity, it can be awkward to track your cash tips income. You may even occasionally have to dip into your own wallet to give a customer change for a large bill. Since you’re sitting down and may have little time in between pickups, you need a system that is quick and accurate. The easiest way is to just keep a small notebook on the passenger seat next to you. Date each page ahead of time. When you get a cash tip that day, just note it on the page. You can add up your cash tips at the end of each day or wait until the end of the week to do daily tallies.
How to Report Tips to the IRS
When your employer issues your W-2, they will have already included all your reported tip income in Box 1 of the form. In other words, your tip income was added to your regular income and entered in Box 1. If for some reason you did not report all your tips to your employer, then you can add that amount when you file your tax return. If your employer allocated tips to you, such as from a general tip “pool,” that will show up in Box 8 of your W-2 form.
What if You Don’t Report Tips?
Bear in mind that even if you assert that you don’t receive tips, your employer is reporting a certain percentage of tip income to the IRS under your social security number. So eventually the IRS will contact you about your unreported tip income. At that point you’ll need to pay taxes on that unreported income, possibly along with a penalty. Your tips are considered part of your regular income, even though they may seem like they’re extra “bonus” money. It’s always best to be completely honest and forthright about all of the tip money you receive.
There are nuances and details about tip income that your accountant can help you with. You can also refer to IRS Publication 531 for more information about reporting tip income.