As the old joke goes, tipping is not a city in China. And not only does the IRS have its hand in the tipping jar, but the IRS is serious about getting its share of income from tips and gratuities even if the tips aren’t in cash.
If you have a job where tips are part of your income or even much of your income it’s no surprise that tip income from jobs is taxable. We all know that workers such as waiters and waitresses and valets and casino dealers and hotel room cleaners pay taxes on their tip income. But what might surprise us is all the details that the IRS has about tips and how they are supposed to be reported and taxed.
THE IRS RULES ON TIPS AND TIPPING
Here are some of those surprising details on tips and tipping from the IRS. First of all, the IRS says all tips that workers receive must be reported in their gross income. This tip income includes:
Tips directly from customers.
Tips added using credit, debit, or gift cards.
Tips from a tip-splitting arrangement with other employees.
YOUR TIP MONEY MAY BE SPLIT WITH MANY
In case you don’t know, when you tip a cocktail waitress that waitress may have to split the tip with a bartender. The waiter or waitress serving your food may be sharing the tip with a busboy or cleaner or kitchen workers. When you tip your hairstylist the stylist might be sharing the tip with others in the hair salon. And when you tip a casino dealer, that dealer may have to split that tip with other dealers and with other casino employees including chip runners and other employees who normally aren’t tipped. Car valets may share their tips with other valets.
WHAT ABOUT NON-CASH TIPS?
The IRS says even non-cash tips are taxable. The value of non-cash tips, such as tickets, passes or other items of value is also income and subject to tax.
WHAT TO DO WHEN YOU RECEIVE A TIP
The IRS says if you get tips on your job there are three things to follow to correctly report tip income.
Keep a daily tip record.
Report tips to the employer.
Report all tips on your income tax return.
IRS RULES FOR EMPLOYERS
The IRS also has rules for employers. The IRS says if an employee receives $20 or more in any month, the employee must report their tips for that month to their employer by the 10th day of the next month. The employer must withhold federal income, Social Security, and Medicare taxes on the reported tips.
YES, THE IRS HAS ITS HAND IN THE TIP JAR
Putting spare change from your latte, or leaving 18% as a gratuity on your dinner may not seem significant to you, but think about all these rules the next time you tip. Not only is the tip taxed but the employee might be sharing that tip with others and might be only left with a fraction of that spare change or that 18%.
THINK ABOUT YOUR TAX DEBT AND WHAT HELP YOU NEED
Here’s a tip that you don’t report to the IRS. If you have tax debt and need help to pay your tax debt, you might want to consider the IRS Fresh Start Program and the IRS Offer In Compromise Program, among other options. We offer a free telephone consultation to discuss these options with you. This video tells you what to expect during your free consultation which should take no longer than 15 minutes and does not require exact financial figures.
Here again is the direct phone number to call our senior tax resolution specialist Tom at our office: 949-359-0810
Or, you can call our general number on this page to reach any of our tax resolution experts about the IRS Fresh Start Initiative or the IRS Offer In Compromise.