Tips are taxable income, and a failure to properly report your tip income could lead to the following issues:
- IRS audit of your return.
- Back taxes owed.
- Interest and penalties added to your tax debt.
Tipped employees should be aware of these consequences and properly report their tip income to their employers and the IRS.
Tipped Employees Reporting Requirements
First, you should understand what is considered a tip and keep a daily log of these tips. Discretionary payments determined by a customer and received from those customers are tips. You don’t have to report service charges as tips, and you only need to report your portion of any pooled tips.
If you total tips for the month are at least $20, you also need to report them to your employer. This allows your employer to pay their portion of your Social Security and Medicare taxes.
Finally, you need to report your tips on your tax return as income. If you’ve reported all your tips to your employer, they’ll be included in your W-2. Your employer may also allocate additional tips to you if their total tips were less than 8 % of their gross receipts.
If you don’t report tips to your employer, you can still report them on your tax return. You’ll need to use Form 4137 to calculate your Social Security and Medicare tax on unreported tip income.
Not only will you need to pay these taxes on unreported tips, but you could also face a penalty of 50% of the unreported amounts. This is why it’s important to tell your employer about your tips—they can withhold the proper amounts for income taxes, Social Security, and Medicare taxes, so you won’t owe a large tax bill when you file your return.
If you don’t report your tip income, it’s possible the IRS could flag your return. They may look closer into your tax return or even initiate an IRS tax audit.
You could also end up owing the IRS when you file your return if you don’t report your tips properly to your employer throughout the year. When this happens, you should still file your return on time, but you may need to contact a tax resolution attorney to discuss your options for dealing with your IRS tax debt.
The Gartzman Law Firm can evaluate your case to determine your best tax resolution options. Use our contact form to request a consultation with an Atlanta tax resolution attorney.