Are my tips considered earned or taxable income? What if I forget to report some of them?

tips and income tax

No matter what your employment, if you are earning tips, recordkeeping is of utmost importance. So, what are tips exactly? According to the IRS, they are optional or extra payments given to an employee from a customer. The most common example of this is a server at a restaurant.

With many restaurants there is a provision for tips on the check or when there isn’t a provision on the check, there may simply be a tip jar at the counter. Regardless of whether your server is given a portion of what comes out of the jar or the percentage indicated on the check by the customer – those tips add up to be a part of that server’s overall income. Another portion of the income is generally a wage that should be reported and provided on a W-2 after the first of each year. But, if the server’s W-2 does not include all of their tips, they have the responsibility to report them in addition to all income listed on the W-2.

Here is where good record keeping comes in. The website has a detailed page on tip recordkeeping and reporting. They even have a Publication 1244 which is a pamphlet that includes an “Employees Daily Record of Tips” a Form 4070A — in a usable format. So, if you are just starting to collect tips, be sure to download this free tool.

Tips that amount to more than $20 a month should be reported to the employer. This is typically done using a Form 4070. It provides a place for an employee to report tips to their employer. So together – these forms (both the 4070 and the 4070A) can be used to make your record keeping simple.

Do you have to do this? Yes, the IRS treats tips the same as wages and other forms of income. Failing to report this or under reporting this may be handled similarly to other forms of tax evasion. Credit cards and debit cards leave a paper trail. This kind of trail makes it very easy for the IRS to verify underreporting if they suspect a taxpayer is not reporting their tips.

By the time April rolls around and as you are preparing your tax return, if you realize that you did not report all of your tips and want to catch up – there is a special form for you to use. The website has a form 4137 that lets you deal with this mistake.