July 4, 2019

Tip Income? It's a Frequent Audit Target for the IRS. Here are a Few Things You Should Know ...

Got Tip Income?

Tip Income is a frequent audit target for the IRS.  Here are some pointers from the IRS about handling tip income records, and properly reporting tip income on your individual income tax returns.

IRS Tax Tip 2019-71:  Tip Income

Aside from regular wages, many taxpayers have jobs where they get tips from their clients or customers. Generally, income received as a tip is taxable. Here’s some information to help taxpayers correctly report the income they receive as a tip:

Use the Interactive Tax Assistant.

This tool on IRS.gov asks taxpayers a series of questions. After the taxpayer answers the questions, the tool gives responses based on the answers. Taxpayers can use the Interactive Tax Assistant to find out if their tip income is taxable.

Show all tips on a tax return.

Taxpayers use Form 4137, Social Security and Medicare Tax on Unreported Tip Income, to report the amount of any unreported tip income. This form allows the taxpayer to include it as additional wages. This includes the value of non-cash things someone receives as a tip, such as tickets or passes to an event.

Report all types of tips.

Taxpayers must pay tax on all tips received during the year, including those:
Directly from customers.
Added to credit cards.
From a tip-splitting agreement with other employees.

Report tips to an employer.

Employees who receive $20 or more in tips in any month must report their tips for that month to their employer. They must do so by the 10th day of the next month. When reporting tips, the employee should include cash, check and credit card tips they received. The employer must withhold federal income, Social Security and Medicare taxes on these reported tips.

Keep a daily log of tips.

Taxpayers use Publication 1244, Employee's Daily Record of Tips and Report to Employer (PDF), to record tips. This will help report the correct amount of tips on their tax return.

Tax Concerns?
About Mary Rae Fouts, EA

Mary Rae Fouts, EA provides tax, insurance consulting, and expert witness services to clients throughout the United States.  For more information visit FoutsFinancialGroup.com.

Mary Rae Fouts

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