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Reporting Your Tips


Individuals who work in the service industry often receive tips for their customer service. It comes as a surprise to many people that these tips often qualify as taxable income, so if you work in a restaurant, hotel, salon, or similar industry and have questions about your obligations in regards to your tips, consider calling a tax attorney for advice.

What are Tips?

Tips are optional payments that usually take the form of cash and are given directly by customers to employees in a service industry. Cash tips include those that are received directly from customers, as well as tips electronically paid and distributed by an employer, and tips received by other employees under a tip-sharing arrangement. Cash tips must be reported to employers. Non-cash tips, on the other hand, include payments in mediums other than cash, like tickets or goods given by a customer to an employee. Unlike cash tips, non-cash tips don’t need to be reported to an employer.

There are four main factors that the IRS uses to determine whether a payment qualifies as a tip, including whether:

  • The customer was compelled to make the payment;
  • The customer had the unrestricted right to determine the amount paid;
  • The payment was the subject of negotiations or was otherwise dictated by an employer policy; and
  • The customer had the right to determine who received the tip.

Finally, tips can be categorized as either direct or indirect tips. Direct tips are received directly from a customer (even if part of a tip pool). Directly tipped employees include waiters, bartenders, and car wash attendants. Indirect tips are given to those who don’t usually receive tips directly from customers, such as bussers and cooks.

Keeping a Tip Record

Employees who work in the service industry should keep a daily record of the cash tips they receive and can use Form 4070A to do so. They should also be sure to keep a record of the date and value of any non-cash tips they receive. While not required to report the latter to their employer, employees must still report them on their tax return as part of their income.

Reporting Your Tips on a Tax Return

When reporting tips to an employer, employees must include the period of time covered by the report, as well as their total tips received during that period. Tips must generally be reported to employers within a month of receiving the tip. Employers are then directed to withhold taxes from each employee’s paycheck based on his or her wages and tip income. All tips reported to employers must also be included on the employee’s Form W-2 for reporting on his or her tax return. Any tips not reported will need to be recorded separately on Form 4137.

An Experienced Florida Tax Attorney

If you work in the service industry and have questions about your obligations in regards to your tips, feel free to call CPA, former FBI Special Agent, and dedicated Florida tax attorney Ronald Cutler, P.A. for help. You can set up a free one-on-one consultation by calling 386-490-9949 today.