Tax Tips for Workers Who Earn Tips
Find out what constitutes a tip and your reporting and recording obligations for tips.
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Does the pay from your job include tips? Here are some important tips about tip income:
What Is a Tip?
It might seem obvious, but make sure you understand just what a tip is for tax purposes. You receive a tip if:
- the payment is made free from compulsion
- the customer has the right to determine the amount of payment
- it is not subject to negotiation or dictated by employer policy, and
- the customer generally has the right to determine who receives the payment.
Amounts added to a customer's bill that don't meet these criteria are service charges, not tips. Service charges are part of your wages, not tips. You need not keep track of them or report them to your employer.
Tips Are Taxable
Tips are taxable income, just like any salary or other compensation you receive from your employer. They are subject not just to federal income tax, but to Social Security and Medicare tax as well. If your state has income tax, you'll have to pay that tax too.
The value of non-cash tips, such as tickets, passes, or other valuable items are also subject to tax.
Include All Tips On Your Return
You are supposed to include all tips that you receive during the year on your income tax return. This includes tips you received directly from customers, tips added to credit cards, and your share of tips received under a tip-splitting agreement with other employees.
Report Tips To Your Employer
If you receive $20 or more in cash tips in any one month, you must report your tips for that month to your employer. Your employer is required to withhold federal income, Social Security, and Medicare taxes on your reported tips.
Keep a Record of Your Tips
You are supposed to keep a daily record of your tips. If your employer has an electronic system to record tips, you can use that. However, you must receive and keep a paper copy of the electronic record.
If an electronic record is not an option, you have two alternatives:
- write information about your tips in a tip diary, or
- keep copies of documents showing your tips, such as restaurant bills and credit or debit card charge slips.
You can use IRS Publication 1244, Employee's Daily Record of Tips and Report to Employer, to record your tips.
You also need to keep a record of the date and value of any noncash tips you get, such as tickets, passes, or other items of value. Although you do not report these tips to your employer, you must report them on your tax return. You should keep your daily tip record with your tax or other personal records.
For more information, see IRS Publication 1244 or Publication 531, Reporting Tip Income. Both are available at IRS.gov.