National Association of Tax Professionals (NATP) Appleton, WI – If you wait tables, bus tables, park cars, tend bar, serve cocktails, deliver food, or entertain, and you received $20 or more in tips in any one month – you must report all your tips to your employer. This includes cash tips, charge-card tips, and any tips you get from other employees, minus what you ‘tip out’ or share with colleagues. The IRS requires that federal income tax, social security, Medicare taxes, and, in some cases, state income tax be withheld from income earned through tips.
“There is an ongoing myth that employees only have to report 8% of their total sales as tips,” explains Cindy Hockenberry, NATP Tax Information Analyst. “The 8% allocation rule is a requirement placed on the employer, not the employee.” The IRS requires that the employer determines if the employees have reported tips in the aggregate of at least 8% of the establishment’s gross sales subject to tipping. This rule applies only to large food and beverage establishments.
According to the IRS, keeping records of your tip income is critical. You must keep a running daily log of all your tip income. You can use Publication 1244, Employee’s Daily Record of Tips and Report to Employer, to record your tip income for one year. Publication 1244 includes Form 4070, Employee’s Report of Tips to Employer, and Form 4070A, Employee’s Daily Record of Tips. These forms have space for you to keep track of all necessary information for the tax year.
In addition to complying with the U.S. tax law, there are many good reasons to report all your tip income, including:
* Increased income may improve financing approval when applying for mortgage, car, and other loans.
* Increased worker’s compensation benefits should you get hurt on the job.
* Increased unemployment compensation benefits.
* Increased social security and Medicare benefits – the more you pay the greater your benefits.
* Increased employee pension, annuity, or 401K participation.
Check with your employer for other increased benefits, based on pay, your company may offer, such as life insurance, disability, and the right to purchase stock options.
For more information on reporting tip income, or any tax topic, please contact the experts at the National Association Tax Professionals at 800.558.8002, ext. 3.
Members of NATP work at offices that assist over 11 million taxpayers with tax preparation and planning. The average NATP member has been in the tax business for over 20 years and holds a tax/financial designation and/or a college degree. NATP has more than 18,000 members nationwide. Members include individual tax preparers, enrolled agents, certified public accountants, accountants, attorneys, and financial planners. Learn more at www.natptax.com.
NATP is a nonprofit professional association founded in 1979 to serve professionals working in all areas of tax practice through professional education, tax research, and products. The national headquarters, located in Appleton, WI, employs over 40 staff members.