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Don't get tripped up by tip income
By
Kay
Bell • Bankrate.com
Workers who depend on tips to boost their incomes
know these extra dollars can make a big difference. The Internal
Revenue Service thinks so, too.
Tips are taxable income and must be reported to the
IRS. The agency has a system in place to collect this information
from the employers of people who get a salary and who also commonly
get tips as part of their jobs. By the 10th of each month, if employees
earned tips of more than $20 for the previous month, they must tell
their bosses just how much extra cash they pocketed.
This includes cash tips, as well as amounts added
to credit cards and any money employees share.
How tips add up
The employer takes the reported tip amount, adds it to the worker's
base pay amount and then figures the appropriate amount of income
tax to withhold from the employee's paycheck. Tip earners should
keep a running daily log of this money. A tip worksheet is available
in IRS
Publication 1244, Employee's Daily Record of Tips and Report
of Tips to Employer.
What about those occasional months when customers
aren't feeling very generous and you don't make enough tips to alert
the boss? Sorry, but you're not off the tax hook. All tips, even
those amounts that fall under the $20 reporting limit, still are
taxable. The IRS expects you to own up to them when you fill out
your annual tax return.
And if you work for a large restaurant, you
may find when you get your W-2 form that you got tips you didn't
know about. Restaurants with a large serving staff report a total
called "allocated tips" to the IRS. In essence, this is what your
boss thinks you should have made in tips.
This system was designed to ensure that the
IRS is informed of what it considers reasonable tip income for all
eligible employees, regardless of whether they actually got any
tips. Good recordkeeping can save you
some tax dollars in this situation. If you kept a complete, detailed
daily tip record showing your actual amount of tips, you don't have
to report allocated tips.
Reporting tips as income also could pay off
in later years. In addition to counting toward
income tax, tips also are used to figure out how much should be
paid into a worker's Social Security and Medicare accounts. This
will make a difference when your are eligible to collect these benefits
at retirement, if you are disabled or if your family seeks survivor
benefits.
Not just for waiters
Finally, don't think you can avoid tip reporting because you don't
work for a restaurant.
Anyone who gets a salary or wages and collects
tips -- cab drivers, hairdressers, club attendants, performers --
must report these payments as income. (If you don't get a salary
and work only for tips, that's technically self-employment
income. You won't have a boss to tell the IRS about your tips,
but the tax collector still expects you to report them.)
Details on the IRS requirements of workers who
depend on tips can be found in IRS
Publication 531, Reporting Tip Income.
And workers who live in a state
with a personal income tax need to let that tax collector in on
their tip money, too.
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