Generally, income received in the form of tips is taxable. The IRS provides some information that helps taxpayers report tip income correctly:
- Interactive Tax Assistant Tool. The ITA tool is a tax-law resource that asks taxpayers a series of questions and provides a response based on the answers. Taxpayers can use Is My Tip Income Taxable?.
- Show all tips on a tax return. Use Form 4137, Social Security and Medicare Tax on Unreported Tip Income, to report the amount of any unreported tip income to include as additional wages. This includes the value of non-cash tips such as tickets, passes or other items.
- All tips are taxable. Pay tax on all tips received during the year. This includes tips directly from customers and tips added to credit cards. This also includes tips received from a tip-splitting agreement with other employees.
- Report tips to an employer. If employees receive $20 or more in any month, they must report their tips for that month to their employer by the 10th day of the next month. Include cash, check and credit card tips received. The employer must withhold federal income, Social Security and Medicare taxes on the reported tips.
- Keep a daily log of tips. Use Publication 1244, Employee’s Daily Record of Tips and Report to Employer, to record tips. This will help report the correct amount of tips on a tax return.
Taxpayers should keep a copy of their tax return. Beginning in 2017, taxpayers using a software product for the first time may need their Adjusted Gross Income (AGI) amount from their prior-year tax return to verify their identity. Taxpayers can learn more about how to verify their identity and electronically sign tax returns at Validating Your Electronically Filed Tax Return.