August 13, 2020

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

Receiving additional pay on top of your income can have its benefits. No matter how you receive additional income, it needs to be reported to the IRS when you file your taxes – even tips. Here’s what you need to know to stay on the good side of the IRS.

If you receive tips worth more than $20 each month, it will be considered taxable income. These tips are also subject to Social Security and Medicare tax withholding. The average tip rate in the United States is typically 8%, and those who earn this much in tips are expected to report it to the IRS. 

If the reported tip income is less than 8%, employers are required to allocate unreported income among their employees. This is only applicable to companies that employ more than 10 employees on a typical business day. 

Taxpayers must include all tips they receive on their tax return as it is considered additional taxable income. This includes:

  • Tips directly from customers.
  • Tips added using credit cards.
  • Tips from a tip-splitting arrangement with other employees.

The IRS recommends three ways for a taxpayer to report their tip income correctly:

  • Keep a daily tip record.
  • Report tips to their employer.
  • Report all tips on their income tax return.

It is vital for taxpayers to report their tips as income to ensure that the IRS does not come back at a later date inquiring about missing income that was not reported. To learn more about how your tips should be reported on your tax return, you can visit the IRS website

If you need tax help, contact us for a free consultation.