​(Almost) Everything You Need to Know About Tipping and Taxes

​(Almost) Everything You Need to Know About Tipping and Taxes

03/3/2023 Tags: Announcements, In the News

As anyone who works in a restaurant, bar, salon, or other service job knows, tips are a big part of the pay.

If that’s true for you, below covers most of what you need to know about tipping and taxes. You can also check out our previous blog about withholding on tips (we’re better and funnier now, but there’s still some good info in there, including for employers.) You can also slog through the IRS’s webpage about tipping if you’re bored or have insomnia.

  • Tips can be cash or noncash. And they can come right from customers, be distributed by your employer, or come from a co-worker through a tip-sharing arrangement. Usually, you have to report cash tips to your employer. (If you get less than $20 a month in tips, you don’t have to report that to your employer. But you do still have to claim it on your taxes.)
  • Noncash tips include items like tickets, passes, or anything else that’s not money and comes from a client or customers. You don’t have to report noncash tips to your employer.
  • Tips can also be direct or indirect. Servers, bartenders, stylists, etc., receive direct tips. Bussers, cooks, barbacks, and the like usually receive indirect tips.
  • If you’re tipped, you gotta keep a daily record. You can use Form 4070A to keep track.
  • If you get any noncash tips, you should keep a record of those, too, including the date and the value. You’ll need to report the value on your tax return.
  • Come tax time, your employer should give you a Form W-2 that includes your reported tips. If you missed any tips, make sure to include those on your return as additional wages. For that, you can use Form 4137. Remember that you’re liable for your share of Social Security and Medicare tax on tips you don't report to your employer.
  • Employers with tipped employees are required to:
  • Keep their employees’ tip reports.
  • Withhold taxes, including income taxes and the employee's share of Social Security tax and Medicare tax, based upon employees’ wages and reported tip income.
  • Pay the employer share of Social Security and Medicare taxes based on the total wages paid to tipped employees and the reported tip income.
  • Report this information to the IRS on Form 941.
  • Deposit the withheld taxes in accordance with federal tax deposit requirements.

Questions about taxes and tips? Let us know.

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