Reporting Tips As Income On Your Tax Return
Tips are often a vital part of the income earned by those who work in the service industry. And like most forms of income, they are taxable. Unfortunately, many people don’t understand the tax obligations that come with earning tip income. To ensure that you don’t end up stuck with a surprise tax bill this year because you failed to report your tips, consider reaching out to an experienced Florida tax return preparation lawyer for help.
What to Include When Calculating Gross Income
Taxpayers who earn tips as a part of their employment are required to include those amounts when calculating their gross income during tax season. This requirement applies to:
- Cash tips received directly from customers;
- Tips charged electronically via credit, debit, or gift card; and
- Tips collected from other employees through tip splitting, tip pools, or other tip sharing arrangements.
Even the value of non-cash tips, like tickets, passes, or any item of value, can also qualify as tip income and are subject to tax.
Correctly Reporting Tip Income
It can be easy for tips to fall through the cracks when it comes to reporting income. To help with this endeavor, those who work in the service industry are encouraged to:
- Keep a daily record of the tips they earned, including a record of the date and value of any non-cash tips received (which don’t need to be reported to employers, but must be included on a tax return);
- Report all of their cash tips that exceed $20 to their employer in a written statement that includes the employee’s signature, contact information, and SSN, as well as the month or period covered by the report, and the total amount of tips received during that period; and
- Report all of their tips on their tax returns.
Employees who receive $20 or more a month in tips are required to report those amounts to their employer by the tenth day of the next month. For instance, tips received by a worker in August of 2022 must be reported by September 10, 2022. If the tenth falls on a weekend or legal holiday, employees can submit the report the next day. The employer will then be responsible for withholding federal income, Social Security, and Medicare taxes on those amounts.
It’s important to note that employees aren’t required to include service charges in their daily tip records. These are charges added to a customer’s bill by an employer. An extra charge for a large party at a restaurant, for instance, would qualify as a service charge. While not considered tip income, these charges do constitute non-tip wages and so are still subject to taxes.
Do You Need Help With Your Tax Return?
To speak with experienced tax return preparation lawyer, CPA, and former FBI Special Agent Ronald Cutler, P.A., please call our office at 386-490-9949 today. You can also set up a free, one-on-one consultation with a member of our legal team by filling out one of our brief online contact forms.