I know it is a mantra that comes up often, even from my own lips (or fingers in this case), but it is said/typed so often because it is true – if you earn money, chances are REALLY good that the IRS wants to know about it. Even with this being the case, tips sometimes seem to be in a gray area for many.
To follow the mantra, yes, if you’re receiving tips in your job, chances are REALLY good that the IRS wants to know about it. If you want a little more clarity and direction on this issue, though, the IRS actually has an Interactive Tax Assistant on the internet that will bring you through a series of questions to get a better answer on if your tips are taxable.
In this time when more people are using electronic forms of payment instead of cash, many tips are already being reported as part of a worker’s pay and being taxed accordingly. When it comes to cash, however, things get trickier.
It is not that the form of payment will cause tips to be taxed differently, but the fact that employers can let those go into that gray area. There are plenty of times when if you accept a tip, your employer may never know about it, and quite possibly doesn’t want to know about it. In that situation, well, I cannot necessarily encourage it, but it a client wants to keep it unreported and not want to worry about it, I have to shrug and move on.
I do, however, want to offers some, well, tips on how one can think about and track their tips if this is an area where you want better, and possibly more legal, record keeping.
First, it is not just cash and credit transactions that count as tips. If you receive items such as tickets or passes as tips, the value of those would also count as additional wages, and very likely unreported income. For any of these unreported tips, you will want to fill out a Form 1137 with your tax return.
In that type of full reporting, it could include tips received as part of a sharing partnership with co-workers. This is a situation that may make you want to be extra cognizant about keeping track of your tips. If you have co-workers that are fully reporting what they receive, and you are not, that is a discrepancy that could stand out. In fact, this is something that if done as it should will even include names on IRS Publication 1244. On that sheet, one tracks daily tips through different forms, including what is paid out to other employees.
I do not often like to give such links to different forms and such in this space, because I know it is not that exciting and gets into the minutiae of taxes and record keeping that make many cringe. As the concept of a sharing economy grows, however, it is likely that more and more people will be receiving tips as part of their income, and it could be one of those areas not given enough attention when it comes to figuring out your tax responsibility.
Let this be a reminder then that you probably don’t want to just ignore the issue.
To ensure we don't make the folks at the IRS ornery, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.