Earlier this year PaycheckCity reported on the controversial IRS ruling that reclassified some restaurant servers’ automatic gratuities from a tip to a wage, thus making these gratuities subject to additional taxes on the employee and employer fronts. While the IRS ruling [Rev. Rul. 2012-18, 2012-26 I.R.B. 1032; Ann. 2012-25, 2012-26 I.R.B. 1054] went into effect in mid-2012, food and beverage restaurants had until January 1, 2014 to become in compliance.
Now,as the 2013 tax filing system is well under way, the IRS is also issuing important reminders to workers who get tips on the job from customers. Read on to make sure that you are up to date on what you should know about your tip income.
• Tips are taxable . You must pay federal income tax on any tips you receive. The value of non-cash tips, such as tickets, passes or other items of value are also subject to income tax.
• You must include the total of all tips you received during the year on your income tax return. This includes tips directly from customers, tips added to credit cards, and your share of tips received under a tip-splitting agreement with other employees.
• Report tips to your employer. If you receive $20 or more in tips in any one month, from any one job, you must report your tips for that month to your employer. The report should only include cash, check, debit and credit card tips you receive. Your employer is required to withhold federal income, Social Security, and Medicare taxes on the reported tips. Do not report the value of any noncash tips to your employer.
• Keep a daily log of tips. Use Publication 1244, Employee's Daily Record of Tips and Report to Employer, to record your tips.
For more information, see Publication 1244 or Publication 531, Reporting Tip Income. The IRS also has a number of other resources regarding tips:
• Tax Topic 761 - Tips – Withholding and Reporting
• Form 4137, Social Security and Medicare Tax on Unreported Tip Income
• Reporting Tip Income - Restaurant Tax Tips
• Tip Income for Indian Tribal Governments