Taxpayers who work in a profession which relies on tips are required to pay federal income, Social Security and Medicare taxes on their tips, even though these taxes are already taken out of their paycheck from their employer. Tips are considered part of the total compensation for your work and the IRS taxes this form of income, much to the dismay of hard working taxpayers out there.
It is important to remember that non-cash tips, including valuable items such as passes and tickets, is also considered income and is taxable. When you file your tax return, you must include all of your tips as your gross income on your return. Tips are anything received directly from customers including cash, money added to credit cards, and tips split with fellow employees.
Each month, taxpayers who receive tips should report their tip income to their employer if they receive more than $20.00 per month in those tips. To keep track of your tips, you can use IRS Publication 1244, Employee’s Daily Record of Tips and Report to Employer. With this form, you can keep a running tab on how much in tips you have received to make it easier for you to put together during tax season.
For more information about reporting tips for tax purposes, see IRS Publication 531. For IRS Publication 531, Reporting Tip Income and Publication 1244, you can go to the IRS website at http://www.irs.gov or order the forms by calling the order forms and publications hotline at 800-TAX-FORM (800-829-3676).