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Are Tips Taxable Income?

If you receive compensation through tips then there are some key issues to take note of:

• Tips are treated as taxable income.  They are subject to federal income, Social Security and Medicare taxes. Also, the value of non-cash tips are considered income.

• Tips need to be included on your tax return.  You must include in your gross income all cash tips you receive from customers, tips added to credit cards or debit card purchases and your share of any tips you receive from a splitting agreement.

• Keep a daily log of your tip income.  It’s best to keep a running log of any tips you receive.  The IRS Publication 1244, Employee’s Daily Record of Tips and Report to Employer should be used.

• Report tips to your employer.  Typically the minimum that needs to be reported is $20 or more in one month.  So if you receive $20 or more in one calendar month then you need to be reporting that income to your employer.  Your employer is required to withhold the correct federal tax, Social Security tax and Medicare tax.

• State income tax.  Tip income might be taxable by your state.  It’s best to talk to your tax preparer to make sure you’re on track.

If you have any questions about your tips, then give us a call at 573-686-3053.