Cash tips reporting can seem a bit confusing.
Let’s say you just had some excellent customers who were so happy with your service that they left you a fantastic tip.
Working for cash can be both alluring and daunting. On one hand, you get paid in hand and don’t have to wait for your paycheck to clear.
On the other hand, you must follow the IRS guidelines for reporting cash tips.
In this blog post, we break it down into simple steps so you can make sure your tax return is filled out accurately.
What Are Tips, Exactly?
According to the Internal Revenue Service, tips are discretionary (optional or extra) payments determined by a customer that employees receive from customers.
Tipped employees can receive tips in a variety of ways and forms.
Cash tips from customers, an electronic tip left through a credit card, debit card, or other electronic payment, and tip pools.
Cash tips reporting isn’t the only thing we need to keep track of. Guess what else is considered tip income?
Say you are in the restaurant business and a customer gives you some tickets to a concert, a baseball cap, or some shoes. Noncash tips are also tips.
These are all subject to federal income taxes.
Is there ever a time tips are not subject to tip reporting?
As the IRS explains, “If the total tips received by the employee during a single calendar month by a single employer are less than $20, then these tips are not required to be reported and taxes are not required to be withheld. “
What Are NOT Tips, Exactly?
The Internal Revenue Service defines a tip as having these factors.
- The payment must be free from compulsion: this means as the customer, you don’t need or have to do it
- The customer must have the unrestricted right to determine the amount
- The payment is not the subject of negotiation or dictated by employer policy
- The customer has the right to determine who receives the payment
So, basically, if the payment and amount is required and you didn’t get to decide who it goes to, it is NOT a tip.
For example, an 18% service charge at a restaurant is not a tip.
Cash Tips Reporting For Employees
#1 Keep a Record
If you are an employee who receives tips, you must keep a daily record of tips received.
To do this, you need to keep a record of all the tips you receive. An employee’s daily record needs to have the amount, the date, and where you received it.
You don’t need to report every tip to your employer, but you do need to report the total amount you earned in tips when you file your tax return.
You may, but do not have to, use the Internal Revenue Service’s form 4070A.
#2 Report Tips to Your Employer
If you make less than $20 per month in tips, you do not have tip reporting responsibilities.
If you receive more than $20 in tips in a month, you need to report them to your employer. This is because your employer is required to withhold Social Security and Medicare taxes on your tips. Failure to report your tips to your employer could result in penalties.
If you need to report tips to your employer, you will need to give them a written statement with this information:
- Employee signature
- Employee name, address, and social security number
- Employer’s name and address
- Month or period the report covers
- Total tips received during the month or period
Do not include service charges in your daily tip record.
Service charges are not included in your daily tip record because they are not considered tips by the Internal Revenue Service.
Service charges are perceived as regular wages. These charges are usually pooled and then divided among the staff, which is a practice often used when a large group is being served.
This is distinctly different from tips, which are given directly from customers to individual service employees at their discretion.
While both tips and service charges contribute to an employee’s income, they are managed and reported differently due to their distinct characteristics.
Keeping A Record Benefits You
Maintaining a precise record of your cash tips is crucial for several reasons. Firstly, it ensures compliance with tax laws, as failure to accurately report your income can lead to penalties from the IRS.
Also, when applying for loans or credit, lenders often require proof of income, and your records of cash tips can provide this necessary documentation.
Keeping track of your tips can help you understand and manage your income more effectively, making it easier to budget and plan for your financial future.
In some instances, your tips could impact your eligibility for certain benefits or programs which base their thresholds on income, reinforcing the importance of accurate recordkeeping.
Staying organized throughout the year is crucial when it comes to managing and reporting your tax obligations, especially for those with tip income.
It reduces the stress and rush of trying to gather a year’s worth of financial records at the last minute. It minimizes the risk of omitting valuable tax information, which could potentially lead to penalties or loss of eligible deductions.
Regular organization also aids in foreseeing any potential tax liabilities and planning ahead for them. Maintaining an organized system of your financial records serves as a valuable tool for personal financial management and budgeting beyond tax preparation.
#3 Report All Tips on an Individual Tax Return
Just because you may not have needed to report tips to your employer, you still need to report them to the IRS.
Another important thing to remember is that you may need to make estimated tax payments throughout the year if your earnings (including your cash tips) are not subject to withholding.
Reporting cash tips on an individual tax return is a crucial step in ensuring compliance with the IRS.
To report your cash tips, use IRS Form 1040, Schedule 1, and report all tips received, including both cash and non-cash tips.
Do not forget to include tips that you reported to your employer and those that you did not.
The total amount of tips should be added to the line labeled “Additional Income”.
Furthermore, remember to include your allocated tips, which are the tips your employer assigned to you, usually found on your W-2 form, Box 8.
Always consult with a tax advisor or use a trusted tax preparation software to ensure accuracy and compliance with the latest tax laws and make sure you don’t have unreported tip income.
Free Resources To Help With Taxes
Taxes can be abundantly confusing. If you have questions, there are several places you can turn to for free tax advice.
The IRS itself offers a variety of tools and resources on its website, including detailed instructions for each tax form and a searchable database of tax information.
The Volunteer Income Tax Assistance (VITA) program provides free tax help to people who generally make $57,000 or less, persons with disabilities, and limited English-speaking taxpayers.
The Tax Counseling for the Elderly (TCE) program that offers free tax help for all taxpayers, particularly those who are 60 years of age and older.
For individuals who earn cash tips, there are several resources to help manage and report this income.
- Tip Rate Determination and Education Program by IRS provides education to businesses where tipping is customary and helps employers and employees understand their tax responsibilities.
- Publication 531: Reporting Tip Income – This IRS publication provides detailed information on how to report tip income.
- TurboTax: An online tax preparation software that has helpful resources and walkthroughs for reporting tip income.
These resources can provide valuable information and guidance on the proper reporting and management of tip income.
Always consult with a tax professional if you have specific questions or concerns.
Now you have some guidelines to help you manage reporting your tip income.
Keep track of your tips, report them accurately, and don’t forget to make estimated tax payments if necessary.
Getting organized will help you to be able to focus on things that serve you, like investing for your future.
We know you love your fantastic customers who gave you a generous tip, but perhaps you have ambitions to be your own boss or work in an entirely different industry.
Being organized with your taxes plays a pivotal role in unlocking the doors to other ventures such as starting a business.
Clarity in financial matters provides a reliable foundation upon which to make important decisions.
When you have a precise understanding of your income and tax obligations, you can more accurately project your available capital, which can be invested in a new business or other ventures.
Demonstrating financial responsibility and understanding through meticulous tax organization can also increase your credibility in the eyes of potential investors and financial institutions.
It allows you to focus on the strategic aspects of your business, rather than getting lost in administrative hurdles. Ultimately, comprehensive tax organization is a cornerstone of fiscal health and entrepreneurial flexibility.