- The IRS requires employees who receive more than $20 in tips in a month to record their tips at the end of their shift. Tips are considered income if they come directly from the customer, from your employer or from a tip-pooling arrangement. Subtract any tips you paid to other employees as part of any tip pooling. The IRS considers non-cash tips such as tickets or gifts to be income as well. Record the fair market value or face value of any non-cash tips when you receive them.
- Your employer calculates the amount of taxes to withhold from your paycheck based on your total income, including your base pay and your tips. Reporting your tip income to your employer helps ensure your employer withholds the correct amount of taxes. If your employer doesn't already have a way for you to report your tips, the IRS provides Form 4070-A as a way for employees to record and report their tip income to their employers.
- Report all of the tips you received in a given year on your income tax return. Your employer may send you a W-2 at the end of the year reporting an amount of "allocated tips." The IRS developed the Attributed Tip Income Program (ATIP) to promote tip income reporting. The allocated tips amount is the amount your employer believes you should have made during the year. This amount may be higher or lower than the actual tips you received. Report your actual tip amount regardless of your allocated tips amount.
- Avoiding penalties and other fines is only part of the reason you'll want to report all of your tip income. For instance, since many lenders base their decisions on the income you report on your taxes, including your tip income on your tax returns may help you qualify for a loan. Plus, the government bases your Social Security and Medicare eligibility on the amount paid into these accounts by you and your employer. Accurately reporting your total income, including tips, will ensure you receive the benefits you're entitled to.
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