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Tip Income; How It Affects Your Taxes
Summer is almost here and you probably have a child or a grandchild who has just landed their first summer job. It's a great way for them to build character and also gain some of their own independent income. But what should they do if they get tips from their job? If you or a loved one receive income from tips, there are several things you should know about tips and taxes.
Here are a few tips from the IRS to help you file and report your tip income correctly:
Show all tips on your return. You must report tip income. This includes the value of non-cash tips such as tickets, passes or other items.
All tips are taxable. You must pay tax on all tips you received during the year. This includes tips directly from customers and tips added to credit cards. This also includes your share of tips received from a tip-splitting agreement with other employees.
Report tips to your employer. If you receive $20 or more in any one month, you must report your tips for that month to your employer by the 10th day of the next month. Only include cash and check and credit card tips you received. Your employer must withhold federal income, Social Security and Medicare taxes on the reported tips.
Keep a daily log of tips. Use Publication 1244, Employee's Daily Record of Tips and Report to Employer, to record your tips. This will help you report the correct amount of tips on your tax return