Some taxpayers mistakenly believe they are not required to report their cash tips to the IRS, which can lead to a lot of trouble during tax time. Generally, income received from any source is taxable. Thus, tips received by taxpayers are considered income and subject to federal income tax.
If you or someone you know receives tip income, be sure to read through the following information to gain a better understanding of the tip reporting requirements.
Employer Reporting Threshold
If an employee receives cash tips of $20 or more in any month, the employee must report their tips for that month to their employer by the 10th day of the next month. For example, if an employee receives more than $20 in tips in August, then the employee is required to report the total amount in tips received to their employer by September 10th. The employer is required to withhold federal income, Social Security, and Medicare taxes from the reported tip income.
Note, even if you receive less than $20 in cash tips for the month, you are still required to report the amount on your tax return; however, you are not required to report the amount to your employer.
Taxpayers must include tips as part of their gross income on their tax return. This includes:
Tips received directly from customers;
Tips received from credit cards; and
Tips from a tip-splitting arrangement with other employees.
The value of non-cash tips (e.g., concert or sports passes) is also considered income and subject to tax. Although you do not report these non-cash tips to your employer, you must report them on your tax return.
Taxpayers should consider adopting the following three habits to assist in reporting tip income:
Keep a daily tip record;
Report tips to their employer; and
Report all tips on their income tax return.
Note, do not include "auto-gratuities" in your daily tip record (e.g., 18% charge for parties 6 or more). These additional charges your employer adds to a customer's bill do not constitute tips; they are considered service charges.
Use the Interactive Tax Assistant
Taxpayers can use the Interactive Tax Assistant (Is My Tip Income Taxable?) on IRS.gov to find out if their tip income is taxable.
For more information, see the following resources: