Every tip you receive as part of your job counts as taxable income. This includes cash, credit cards, debit cards, tip sharing at work, and, believe it or not, the cash equivalent of things likes concert or sport tickets given to you as tips. If you receive more than $20 a month in tips, you're required to report that money to your employer each month. Your employer then withholds federal income tax, Social Security, and Medicare from this money [source: Bell].
Tip income isn't limited to restaurant and bar workers, either. Other people who work for tips include:
By the way, service charges (that 18 percent gratuity sometimes added to a restaurant check) are not treated as tip income. However, they are treated as wage income, so you'll have to pay taxes on those, too. Your employer will likely take care of that on your paycheck and W-2.
The most important thing to remember when reporting tip income is recordkeeping. Keeping accurate records of your tips helps your employer withhold the correct amount of taxes from your paycheck, and allows you to report the correct amount when filing your taxes [source: IRS]. Some employers require you report your tips at the end of your shift. Some require you report on the 10th of each month. Either way, you should keep a record of your tips each day. You can use a notebook, a spreadsheet, or even a smartphone app designed specifically for tracking your tips.
Now that you have a little background, keep reading to learn how to report your tip income to the IRS come tax time.