TIPS AND TAXES:
WHAT YOU NEED TO KNOW
What do waiters and waitresses, taxi and limo drivers,
and hairdressers and spa workers have in common? They
are all service industry workers who derive a
significant portion of their income from tips. Those
tips must be reported to the Internal Revenue Service
(IRS). Here, the Wisconsin Institute of CPAs offers
its own “tips” concerning the rules governing how to
report tip income.
Keep a daily record of tips
The IRS requires employees who receive tips to keep a
daily tip diary or to use some other method to record
tip earnings. These records must show how much you
were paid directly in cash tips and how much you
received from your employer in credit card tips. You
must also record tips you received through tip-sharing
arrangements and the amounts you “tipped out” to other
workers.
One way to document your tips is to use IRS Form
4070A, Employee's Daily Record of Tips, as your
personal tip diary. If you are audited, this can help
verify your tip income.
Report tips to your employer
Anyone who receives $20 or more in tips during the month
must report to his or her employer the total amount of
tips received by the tenth day of the following month.
If the tenth falls on a weekend or holiday, the
information is due on the next business day.
This reporting requirement applies equally to employees
who are tipped directly from customers, such as
restaurant servers and hairdressers, and to those who
are tipped indirectly, such as bus boys. When reporting
your monthly tips, you must provide your employer with
your name, address, Social Security number, employer’s
name and address, the month for which you are reporting,
and the amount of tips you received.
Your employer uses the amount of tip income you report
to determine how much income tax withholding to deduct
from your paycheck. The tip amount you report also
determines how much your employer pays into your Social
Security and Medicare accounts. This, in turn, affects
the Social Security and Medicare benefits you and your
family qualify for when you retire, become disabled, or
die.
PROTECT YOURSELF FROM ALLOCATED TIPS
It’s especially important for individuals who work in
large food or beverage establishments to keep accurate
tip records. That’s because some restaurants allocate to
each employee an estimated amount of tips. Tip
allocation is required by the IRS when the total amount
of tips employees report to the restaurant during a
given period falls below a required minimum percentage
of gross sales.
As a general rule, if your Form W-2 shows allocated
tips, you must report this amount as income unless you
have a daily tip record documenting the amount of tips
you actually received. If you do, you can claim as
income only the amount of tips that you actually
received.
Report all
tips on your income tax return
All tips – even those that you are not required to
report to your employer because the total for the month
is less than $20 – are still taxable and must be
reported on your tax return. The same holds true for
noncash tips, such as tickets, passes, or other items of
value.
WORK WITH A CPA
The IRS has a number of programs in place to ensure that
tip income is reported. If you’re unsure of your tip
reporting obligations, meeting with a CPA can help
ensure you comply with IRS requirements.
The WICPA is the premier professional organization for
Wisconsin CPAs, with more than 8,200 members working in
public accounting, industry, government and education.
Please include the CPA credential in source
identification. Like other professionals, certified
public accountants are required to obtain additional
education, take a rigorous exam and become
certified. Please identify all CPAs by including the
credential with their names. This identification
enhances the accuracy and credibility of your reporting.
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Produced in cooperation with the AICPA
©2006 The American Institute of Certified Public
Accountants
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