Tips, Earnings and Taxes: What You Need To Know

If you work in a service where you get tips, guess what? The IRS expects you to report them and pay taxes on them.

Your Tip Earnings and Taxes

The internal revenue service takes a straightforward approach to tips. It views all tips you make in your job as taxable income that must be reported and for which taxes must be paid. Put another way. The IRS has a simple but brutal view of taxes.

Now tips come in different forms. Some are received directly from customers, while others are automatically added to the customer’s bill. The IRS takes the position to report and pay taxes on both amounts. This also includes taxes you earn through any group splitting where all tips are collected together and then split amongst the employees. On top of this, the IRS also believes that any non-cash tips such as tickets to something are also income that should be reported and taxes paid on. Put another way. The internal revenue services get you coming and going.

The internal revenue service requires you to take some steps in reporting tips to make things a little more brutal. If your tips total $20 or more in any calendar month from a single job, you should report the total to the employer by the 10th day of the following month. The employer should withhold federal income tax, social security, and Medicare taxes from your paycheck. Keep in mind that the failure to do so can lead to the placement of a 50 percent penalty on your taxes. The IRS is pretty serious about getting its money.

Tips paid to waitresses, bartenders, barracks, and so on are a hot spot with the IRS and always have. Since tips tend to be given in cash form, the potential for forgetting to report them is exceptionally high. The IRS seems to think so and has shown a generally aggressive attitude on the subject. If you indicate you are a waitress or bartender on your tax return but fail to report any tip income, it could be audit time.