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Getting Taxed on Tip Income

Don't Forget Uncle Sam When You're Counting Your Tips

If you're in the service industry, a big chunk of your income may come from tips. But don't think you can get away with not filing taxes for them. Here are a couple of tips from the IRS:

  • Tips are taxed. Your tips will face federal income, Social Security, and Medicare taxes. You will also be taxed on nonmonetary tips like tickets, and gifts will be counted as income.
  • Include them on your tax return. Include your cash tips, tips added to credit card bills, and tips you split with co-workers when reporting gross income on your tax return. "Report your tips with your wages on Form 1040, line 7; Form 1040A, line 7; Form 1040EZ, line 1; Form 1040NR, line 8; or Form 1040NR-EZ, line 3."
  • Report to your employer. If you earn more than $20 in tips, you need to report this income to your boss. Your employer is required to withhold federal income, Social Security, and Medicare taxes. You don't have to report nonmonetary tips to your boss. If you don't report these tips to your employer, you will face a penalty.
  • Record your tips. Be organized and record your tip income. You can use Form 4070A, Employee's Daily Record of Tips, to record your tip income. To get the form, ask your employer or the IRS for Publication 1244, Employee's Daily Record of Tips and Report to Employer. Publication 1244 includes a year's supply of Form 4070A. Record nonmonetary tips separately and include that on your tax return. You can even keep a tip diary electronically by requesting access to an electronic system provided by your employer.
  • Watch the deadline. Turn in your monthly tip records with your employer by the 10th of the next month.
  • Don't include mandatory service charges: don't note down mandatory service charges in your tip diary as these are considered part of your wages, not tips.
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