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?
Actually, yes.
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.