If you work in the service industry and receive tips, the IRS considers your tips as taxable income.
Therefore, you must include all tips received in your gross income. This includes:
- Tips directly from customers.
- Tips added using credit, debit or gift cards.
- Tips from a tip-splitting arrangement with other employees.
The value of non-cash tips, such as tickets, passes or other items of value is also income and subject to tax.
Three things can help taxpayers to correctly report their tip income.
- Keep a daily tip record.
- Report tips to their employer.
- Report all tips on their income tax return.
What employers need to know
If an employee receives $20 or more in any month, they must report their tips for that month to their employer by the 10th day of the next month. The employer must withhold federal income, Social Security and Medicare taxes on the reported tips.