It is hard to believe that it has been almost a year since the Tax Cuts and Jobs Act was passed. Because of that, much of what has been discussed in tax circles throughout 2018 has been new rules. Today, though, I think it is worth giving some time to an issue that is a perpetual one – tips.
I think a big part of why this is such an endearing question is because those who make tips tend to see them as separate from their wages. And this makes a lot of sense - they are received in a different way, aren’t always received in a paycheck, and seem to be earned from a customer instead of an employer. In the end, though, the disappointing answer to how tips are handled is that they also are subject to taxes.
I am now going to be even more disappointing for this taxation is supposed to happen no matter how the tips are received. Whether they are received in cash, part of a credit card transaction, or divvied up with coworkers in a sharing arrangement, they are all supposed to be reported and subject to tax withholding.
Legally, employees are supposed to report cash tips received to their employer by the 10th of the following month. That amount is then to be recorded as part of one’s pay so that the appropriate taxes can be withheld.
But yes, I knowingly prefaced the last paragraph with “legally.” I’m not going to be naïve enough to pretend that some do not report all of their tips, or that there possibly unspoken arrangements in an establishment to not speak of all the tips that come through. So if some tips have never been reported, that is out of our hands here when tax time comes. I am just making it my job to speak of the legal obligations, what you choose to do with that information is in your hands. But yes, when cash is simply handed over, reporting can be tricky and spotty.
When these tips are reported, they are subject to income tax, employee Social Security tax, and employee Medicare tax. It is quite understandable how it can feel it like a hit when you have to pay into multiple areas out of money that already reached your hand. If you keep up with reporting this month by month, though, you can learn to estimate how it will affect your paycheck. Possibly more importantly, though, is that you the regular reporting keeps there from being any big surprises come tax reporting time. When things are done monthly, payments are being made, preventing large ones being needed come April.
The rules on tips can get a little more complicated when you reach higher numbers, but I will not discuss those here. Those don’t tend to be the questions I get when it comes to this area anyway. Instead, it is almost always about whether tips are taxed at all, and now you know the answer.
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