ANSWERS: 1
  • When filing taxes, you must report all income unless specifically exempt by law. Tip income is reportable as ordinary income, and should be reported to your employer so that it will be included on your W-2 form.

    Ordinary Income

    Ordinary income is taxed at the appropriate rate from the IRS tax tables, according to your filing status. You must also pay Social Security and Medicare taxes on ordinary income.

    Social Security and Medicare Tax

    If you report your tips accurately to your employer, Social Security and Medicare taxes will be withheld from your pay. You should not need to pay anything at the end of the year. If the hourly pay is not enough to cover all of your tax withholding, you will need to pay your employer the difference from your tips.

    Income Tax Withholding

    When you report your tips to your employer, income tax is withheld from your hourly pay. If this is not enough to cover your tax withholding, you will need to pay your employer the difference from your tip money.

    Reporting

    Employees that receive tips should keep a daily log for their records. Employees can report daily tips to their employer on form 4070A, or compile their own tip reporting sheets.

    Interest and Penalties

    To avoid interest and penalties, make sure that you report your tips accurately throughout the year. This will ensure that the correct amount is withheld to pay your income tax, Social Security tax, and Medicare tax so that you owe nothing at the end of the year.

    Source:

    IRS.gov.: Publication 531 Reporting ip Income

    PAYCHEX: Tip Income 101

    The CPA Journal: Unreported Tip Income: A Taxing Issue

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