Tips on tip reporting

If you are like millions of taxpayers who work in the service industry, you may receive tips. The tax code is clear; if you receive tips you must report them as income. Some employers have systems to make this easy, while others do not. Here are some suggestions:

Think 1-2-3

Proper tip reporting has three components.

1. Keeping a daily tip record

2. Reporting your tips to your employer

3. Recording your tips on your income tax return

Recording tip activity

Per the IRS, you can keep your tips by either maintaining a tip diary or by saving documents that show your tips. If your employer does not provide you with an electronic form of a tip diary, you can always create your own. The IRS has one for your use in Form 4070A.

Reporting tips to an employer

You should record daily activity in your diary and then provide a monthly summary to your employer by the 10th of the following month. The report should include the following elements:

·         Your name and address

·         Your social security number

·         Employer name and address

·         Time period

·         Date submitted to employer

·         Your signature

·         Tip information: cash tips received, credit/debit tips received, tips paid out to fellow workers, and net tips received

Paying taxes

With proper tracking and reporting of tip activity to your employer, filing your taxes on this income can be done without too much trouble. Here are some ideas.

Use your employer for reporting. With proper reporting, your employer can help ensure taxes are withheld and sent in for you. This can help you avoid a large tax bill at the end of the year.

Giving your employer funds. If your tips are a high portion of your income, your wages may not be sufficient to cover your taxes. To solve this, you can provide some of your tip income to your employer to pay a proper level of withholdings on your behalf.

Other things to note

Service charge or tip? If your employer adds a set tip amount to a bill (18 percent automatic tip for parties of six or more), this is not a tip, it is a service charge and is treated as wages.

Shared tips. Be careful reporting those tips you share with others. Clearly report your own net tip income to your employer. Do not report gross tips that you share with others on your tax return.

Know the penalty. If you do not report tips to your employer, the potential penalty is 50 percent of the social security and Medicare-related taxes you may owe on the unreported tips.

Allocated tips. Sometimes your employer pays you tips and reports them on your W-2 that are above what you reported to your employer. The good news? You receive additional income above your hourly wages. The bad news? You will owe income taxes AND social security and Medicare taxes on these tips.

Keeping track of tip income can be made manageable by developing a good reporting system. Please ask for help if you need assistance before it gets out of hand.

About Brenda J. McGivern, CPA

Brenda McGivern started her own certified public accounting and management consulting firm in October 2001. The full service CPA firm provides tax and accounting solutions to meet the needs of today’s small business and individual. Brenda McGivern has become a trusted advisor and valuable resource her clients rely on for timely, accurate assistance when they need it.

Before starting the firm, she worked as an accountant for three years at a local firm and prior to that five years at a large international CPA firm in Boston. She has performed the following tax services: federal, state and local tax planning, international tax planning, estate and succession planning, mergers and acquisitions, capital retention and IRS representation. She has also coordinated assurance engagements, such as financial statement audits, reviews and compilations from the planning phase through the reporting phase. She has prepared and reviewed regulatory filings for numerous regulatory agencies including the Security and Exchange Commission.

Prior to these positions she was selected from over 2,000 candidates into an eight-person intensive financial management program at an international technology company. The program consisted of graduate level classroom study and two six-month rotational assignments in financial operations.

She graduated cum laude from the University of Massachusetts at Amherst and holds a Bachelors Degree in Business Administration with a concentration in accounting. McGivern also holds a license in Massachusetts as a Certified Public Accountant and is a member of the American Society of Certified Public Accountants and the Massachusetts Society of Certified Public Accountants. She resides in Stoughton, Massachusetts with her husband Brian, and their sons Sean, Ryan and Conor and their dog, Davis.

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