Tips for Tips: Employees Who Make Tips

Income and Investments

If you receive pay in the form of tips, those tips are taxable income, and don’t let anyone tell you otherwise.

Here’s how tip reporting works. You report your tips to your employer. Your employer then includes those tips in income through the payroll processing system, and all the applicable taxes, such as federal and state income taxes and Social Security and Medicare taxes are withheld from your check. Your employer will also pay its share of employment taxes on your tip income. The reported tips appear on your W-2 in Box 8.

That’s it in a nutshell, and it’s pretty simple – you report your tips to your employer, they include the tips in their payroll processing, and it appears on your W-2 as tip income. Here are some of the things that you might hear about tips that are incorrect:

  1. If a tip is less than $20 it isn’t taxable. WRONG. If your tips are less than $20 per month, you don’t have to report the tips to your employer. But any tips that you do earn are taxable to you, and you should include them in income on your tax return.
  2. You only have to report 8% of tips. WRONG AGAIN. If your employer is a big company in the business of serving food and beverages, the employer must allocate 8% of total sales to all employees in the form of tip income. But if your tips, net of tip pay outs that you pay to other employees, are greater than the amount allocated to you by your employer, you are required to report the difference on your tax return.
  3. Record-keeping for tips is entirely up to my employer. That would make your life easier, I know, but that too is incorrect. If you receive tips, you are required to keep a diary or other contemporaneous records. At the end of the year, compare the total tips shown in your diary to the tips shown on your W-2. If your diary shows a higher amount, you should report the difference as additional income on your tax return.
  4. Only restaurant employees are required to report their tips. This also is not true. No matter what industry you are in, if you get wages and also collect tips, you must report your tips as income. This applies to hair dressers, cab drivers, performers, anyone receiving tips.

Don’t worry about knowing how to report your tips. TurboTax will ask simple questions about you and help you report your tip income.  TurboTax will also check for over 350 tax deductions and credits and give you the ones you are eligible for based on your answers.

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