In his book, Waiter Rant, blogger and waiter Steve Dublanica said: “If you can’t afford to leave a tip, you can’t afford to eat in the restaurant. Stay home.”
And with that, there could be heard a large shout of agreement from the millions of waiters around the United States.
Just as waiters wish that all patrons knew the “rules” of dining out, the IRS wish that all waiters knew the rules of reporting Tip Income. Getting cash at the end of your shift can feel like a high. It can seem easy and beneficial to not report all, or any, of your tips to the government. Who doesn’t like tax free money? Unfortunately, doing so is not only illegal, but you are also cheating yourself on Social Security and Medicare.
The IRS provides the following guidelines for reporting Tip Income:
Show all tips on your tax 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, 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.
Paying taxes on your tips is not fun. However, when it comes time for you to retire and collect Social Security, you will be very happy that you were a law abiding citizen!