With restaurants beginning to open more fully due to a break in the coronavirus pandemic, employees in the food and beverage industry are soon likely to have a lot more to report on their taxes: Tips.
That’s why the Internal Revenue Service is reminding taxpayers that that tips should be included in gross income when filing their tax return ahead of the May 17 deadline. The agency identifies three specific examples:
- Tips directly from customers.
- Tips added using credit cards.
- Tips from a tip-splitting arrangement with other employees.
Reporting, however, doesn’t stop there. Tips that are made with something other than cash—tickets or free passes for example—have value and, as such, must be included in income.
The Big 3 for tipped employees
If a worker regularly gets tips, there are three things the IRS expects them to do. All are aimed at keeping track and reporting tip income to the IRS.
Write it Down – The first thing employees should do is keep a daily record of their tips. One way to do that is to use Form 4070A, Employee’s Daily record of Tips, which is included in Publication 1244.
Besides the information on the Form 4070A, workers need to keep a record of any non-cash tips they get, including the date and value of the non-cash tip. Remember that a non-cash tip can be any item of value that’s offered as a tip.
While non-cash tips don’t have to be reported to the employer, they do have to be reported to the IRS.
Report Tips to the Employer – All cash tips a worker receives in any month have to be reported to the employer; they’re subject to Social Security and Medicare taxes. If the employee has less than $20 in tips for the month and a single employer, the tips don’t have to be reported and no taxes have to be withheld.
Employees have to notify their employer of their cash tips (which include those made on credit card statements) in writing. No particular form has to be used, but the report has to include some standard information:
- Employee signature,
- Employee’s name, address, and social security number,
- Employer’s name and address (establishment name if different),
- Month or period the report covers, and
- Total of tips received during the month or period.
The IRS says both directly tipped employees and those who are tipped indirectly must report tips to their employer.
To find out if tip income is taxable, visit the Interactive Tax Assistant on the IRS website.
Other resources include Tip Record-Keeping and Reporting; Publication 1244, Employee’s Daily Record of Tips and Report to Employer; and Publication 531, Reporting Tip Income.
Sources: Here’s what taxpayers need to know about reporting tip income on their tax return; Tip Recordkeeping & Reporting
MEA Tax Advisors