10 Questions When Filing Taxes With Tip Income

You're probably racking up tip income with tricks like that. Make sure you know how to report it correctly to the IRS.
You're probably racking up tip income with tricks like that. Make sure you know how to report it correctly to the IRS.

If your first question about filing taxes with tip income is, "Uh, how do I file taxes with tip income?" then you're in the right place. Unless you're an expert tax filer -- or you just have an amazing long-term memory that allows you to recall your detailed tax returns from year to year -- you probably do need a primer on ways to give your tip money to Uncle Sam.

And unlike obnoxious customers who wink at you and tell you their tip to you is to invest in plastics, we have some real advice. Not only will we cover what counts as a tip (and where to count it on your return), but we'll also give you an idea of the best ways to keep track of that income so you don't find yourself guessing, come April.



So how does cash count? Read on to figure out the basics.

10: Is this cash a tip?

At the end of a long day, there is nothing more satisfying than happily flipping through your fresh pile of hard-earned cash. While salaries can be more reliable, and wages might be steady, tip money is nothing to scoff at. For a lot of service workers, it's the income that pays the rent and buys the food. (And for the lucky ones, it pays for that HBO cable package too.)

But what actually constitutes a tip? We'll explore a few options, but the most important is plain old money. Any cash tips -- and that also includes credit and debit tips, which are usually cashed out -- are going to need to be reported as income. There really aren't a lot of exceptions to that rule; you're pretty much obligated to report any tips collectively over $20 a month to an employer. Next? Let's ask why you need to tell your boss about the tips you earn.

9: Do I really have to tell my boss my tips?

As we said, you really do need to tell your boss about the tips you receive. It's not about just making her aware of your stellar service. The boss-person actually needs the number to make sure your tax withholdings are correct. Remember that an employer is taking money out of your wages to help pay your taxes; if the employer is just using an hourly wage, that's not going to be enough to cover the tips you made as well.

If your tax is only withheld on your hourly wages and you also report your tip income on your tax return (which you have to do), you'll have a whopping tax bill come April. That's why receiving more than $20 in tips monthly must be reported to your boss (and if you make less than $20, you'll still have to report it on your return) [source: TurboTax Unreported].

8: Do I need to count the money I tip out to the busser?

It would be really great if all tips were cash and given directly to you. (Add to that wish list that they would be "substantial" and "frequent.") Unfortunately, sometimes they aren't always as straightforward. We'll look at a few examples of ways that your extra income can make it to your pocket -- and how it needs to be recorded on your tax return.

We'll start with a pretty common issue: tip pooling or splitting. While some servers can simply pocket whatever money the customer leaves on the table, a lot of service industry professionals put all the tips into a big pot. They're then given a share of the money earned that night. You might also give a certain amount of your own tips to a busperson or barback who never directly pockets a customer's cash.

Only report to your employer the income you receive from tips [source: IRS Reporting]. If you make a $15 tip on a table and give $5 to the busser, you only have to report $10. Similarly, you only report the fraction of the pool you receive at the end of the night.

7: Is this free ticket to the baseball game a tip?

Tips can get even more complicated when you're receiving some other compensation besides cash for your services. While it may seem like you're getting away with something, there's nothing wrong with accepting noncash tips from customers or clients. (At least according to the IRS. Your boss may have other ideas.) If a regular knows you love baseball and tips you some decent box seats for the game, don't turn the tickets away.

In fact, you don't even have to report it to your boss as income. It's yours to walk away with. But here's the rub: You still have to report it to the IRS. On your W-2, you'll need to add the value of any noncash tips you receive to your wages and compensation. (We'll go over the forms more in-depth later.)

But we're still not out of ways that tips can come in strange packages. Let's check out another vague tip situation.

6: Is this service charge a tip?

As we've said, not every job in the service industry has the same standard operating procedure for how tips are allocated or calculated -- and even those might not be across the board, but have exceptions of their own. Either way, you'll need to keep track of them carefully or else you might find yourself overpaying your taxes.

Service charges are a great example of why you need to keep an eye on your tips for tax purposes. Many restaurants might include a service charge for larger parties -- say, a 15 percent extra charge for more than six customers. Basically, it's the restaurant enforcing a tip on groups. And because it's mandatory, you don't have to report it to your boss as extra income. It should be included in your wages, not as a tip. If the customer has a choice about whether to leave money or not -- or has the right to decide who to leave the payment to -- it's a tip. Otherwise, it's a service charge.