Each summer, thousands of high school and college kids pick up jobs as waitresses and waiters in the hopes of building some savings for the upcoming year. In spite of earning a small salary, these jobs are typically appealing because of the opportunities of earning significant cash each day in tips. However, many young adults who think they can walk away with hundreds of dollars in cash tips each month may not realize that those wages are taxable and must be reported to their employer. To avoid being surprised by a potential tax bill from the Internal Revenue Service, waitresses, waiters and any other person who works in a tips-paying profession should understand the tax implications of their role.
First, it's important to understand that all tips are taxable income and must be reported to employers. There is a common misperception that workers only have to report and pay taxes on tips over $20, but the truth is that the IRS expects all tip income - regardless of amount - to be accounted for for tax purposes. For federal tax reasons, tips that must be reported include cash left at the table, amounts added to credit card charges, tips workers receive from their boss as part of a tip-pooling arrangement and money received from a co-worker for sharing tables or other job tasks. After this income is reported, the employer processes the tip income through the payroll system to calculate and ensure all the taxes applicable to tips - including federal income taxes, Social Security, Medicare, and state taxes - are withheld. As employers are also on the hook for making sure workers are complying with the law, there may be more pressure on workers to accurately report their earnings.
Managing tip income
Many workers who receive tips in their daily business - such as restaurant workers, hair dressers, cab drivers, movers and hospitality employees - may find it challenging to keep up with the amount they receive each year in tips. This becomes especially challenging for those who earn a significant sum in these gratuities each year. The IRS requires that individuals keep a "tip diary" to help them both organize their tips, and compare the final amount to what is listed on their W-2 during filing season. First-time waiters and waitresses might also consider consulting with a tax preparer for more detailed information on their obligations and the best way to manage their gratuity income during their tenure.
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