All About Tips (The Kind You Give at Restaurants). An SFS Tax & Accounting Services Blog.
This shouldn’t be news to anyone, but who are we to judge? It’s worth repeating:
The money that you receive in tips is taxable.
If you receive $20 or more a month in tips, you need to report them.
You must pay tips on all income received during the year, including tips given to you from customers, tips written in on credit card slips, and the tips you receive from tip splitting with other employees.
How Does the IRS Know What you Get in Tips?
They don’t necessarily.
However, the IRS can get a lot better at estimating how much employees are getting in tips. Why?
We are well on our way to being a cashless society.
Only 12% of us prefer to pay in cash, according to the 2017 TSYS® U.S. Consumer Payment Study.
Think maybe people are more likely to pay in cash at a restaurant?
You would be correct… but it’s only a measly 19% of us who prefer that.
So there is a paper trail covering the vast majority of monetary tips.
So How do You Report Tips?
In fact, you are required to keep a daily record of tips on IRS form 1244. You also have until the 10th of the following month to let your employer know about them. Your employer will then withhold federal income, Social Security and Medicare taxes on those tips.
Those Free Passes Count
One little-known fact is that the non-cash things you receive as tips need to be reported as well.
This includes tickets to an event or passes to a game.
These types of tips do not need to be reported to your employer. They do need to be reported on your tax return, however.
What about Service Charges?
One thing to note for restaurant workers (or any industry where it applies): Service charges do not count as tips.
If your employer charges a service charge to large parties, for example, that is not counted as a tip… even if it is given to you.
If they are given to you, they should still be counted in your income when you fill out your return, but they are not tips. They are officially considered “non-tip wages.”
What Your Employer Must do if Enough Tips Aren’t Reported
In an ongoing effort to find unreported income, the tax law has been tweaked for restaurants.
If a large restaurant or bar doesn’t have at least 8% of its gross receipts reported by employees as tips, the restaurant owner has to allocate the difference to all employees receiving tips.
Come again?
Yes, you can actually have tip income added to you under certain circumstances.
I know it sounds crazy, but here’s the important thing to remember: If you have kept good records, that extra amount your employer may have to add to your tip income won’t count on your federal tax return. It may still show up on your W-2, but you don’t have to report it as income if you have records to show what you actually received.
Have I convinced you to keep good records yet?
It’s Not Just About Restaurants
I know we’ve specifically mentioned the restaurant industry here. But there are other industries whose workers receive tips such as the beauty industry (think hairdressers, nail technicians, etc.) that need to be concerned about this as well.
As a business owner, you, too, have some skin in the game.
If your employers receive tips, you need to be sure those tips are being reported. You also need to be certain you are withholding taxes on those tips.
As you can see, when tips aren’t reported, innocent parties – those who are reporting everything – can get hurt.
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Jeffrey Schneider, EA, CTRS, NTPI Fellow has the knowledge and expertise to help you reach a favorable outcome with the IRS. He is the head honcho at SFS Tax & Accounting Services as well as the Enrolled Agent and Certified Tax Resolution Specialist for SFS Tax Problem Solutions.
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Now What? I Got A Tax Notice From The IRS. Help! Defining and deconstructing the scary and confusing letters that land in your mailbox. Jeff defines and deconstructs the scary and confusing letters in a fashion that mixes attention to detail with humor and an intricate clarification of what is what in the world of the IRS.
The book is available in paperback and ebook on https://Amazon.com
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