Claim your tips! In a lot of cases, reporting the tip income will help you! Plus, it's the legal and ethical thing to do, too. The IRS will remind you that all income, including tips, is subject to tax, however, I'm here telling you that you should absolutely claim them because there are many situations where this income will benefit you.
For example, claiming your unreported tips and paying the associated taxes on them will increase your payments to the social security fund and provide a safety net for you when you reach retirement. I know, I know...everyone questions the likelihood of social security being around but still.... it's to good to pay in - just in case! Second, and probably most important, is that low income earners that accurately report tip income may receive a higher earned income credit. The concept of the earned income credit is that you get more of a credit up to a certain level of earnings and then the credit phases out as the income gets too high.
Consult your local Lberty Tax expert to learn how to properly record and report the tips you earn.
If you work in an occupation where tips are part of your total compensation, you need to be aware of several facts relating to your federal income taxes. Here are four things the IRS wants you to know about tip income:
1. Tips are taxable. Tips are subject to federal income, Social Security and Medicare taxes. The value of non-cash tips, such as tickets, passes or other items of value, is also income and subject to tax.
2. Include tips on your tax return. You must include all cash tips you receive directly from customers, tips added to credit cards, and your share of any tips you receive under a tip-splitting arrangement with fellow employees.
3. Report tips to your employer. If you receive $20 or more in tips in any one month, you should report all of your tips to your employer. Your employer is required to withhold federal income, Social Security and Medicare taxes.
4. Keep a running daily log of your tip income. It is very important to record and report your tips to your employer. You can use Pub 1244 from the IRS or consult with a Liberty Tax pro to see what is best for your situation.
Many people think that pocketing their tip money is the best thing they can do - not only is it against the rules, you may be shorting yourself some extra refund money!