It’s the season of tax returns and many rip their hair out at the thought of filing their taxes. To help, we are here to answer your tax queries. If you are in the hotel management industry or wait tables at a restaurant, then you must have one big question looming over your head: Are tips taxable? The short answer is yes. Tips are taxable even though they aren’t your fixed monthly salary. 

Tips you receive in the form of cash are also taxable income. If you are earning more than $20 in tax, you have to report it to your employer. When filing taxes, you will have to use IRS Form 4070 to mention your last month’s tips during the 10th of the current month. 

Do you have to report cash tips to the IRS?

Tips are income. If you receive tips in the form of debit or credit card transactions, that’s also taxable. If you receive tips from your employer or some other employer shares their tips with you, that’s also taxable. On the other hand, the service charges that the customers pay are directly added to their bills. That’s why these service charges aren’t tips and the IRS takes them as regular wages. You will receive these service charges on your payday, unlike tips that you receive every day. Some service charges include:

Keep careful records 

Tally and report every month 

Know how the math works

When you are filing taxes again, do report your tips 

During the tax season, your employer will ask you to file the W-2 form that shows how much you’ve earned throughout the year. Along with this, mention how much you were tipped. This will reach the IRS and they will calculate how much money you owe them. When filing Form 1040, you need to report tips that are less than $20. 

What happens when you don’t report your tips?

Many people try to avoid reporting their tips. This is a big mistake. While cash may go invisible and not leave a trace, the tips you receive on your debit and credit cards leave a paper trail and the IRS will haunt you once they track down your tax evasion. 

Furthermore, if you decide to not report them, this may affect how the Social Security Administration views you. This can affect the benefits you are eligible to receive now and after your retirement.

How to catch up on unreported taxes

If you have evaded taxes for a year, then Form 4137 will come to your rescue. It will allow you to report all the missed and overlooked tips.

On the downside, along with the taxes you owe the IRS, you will be charged with a 50% penalty on the Social Security and Medicare taxes you owe. You can avoid this penalty in the Form 4137 by mentioning that the reason for this tax evasion is a reasonable one. The IRS will forgive your penalty if they find your reason convincing enough. 

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