As a service industry professional, understanding how the IRS treats your tip income is crucial for accurate tax reporting. Let’s break down the essentials to help you navigate the 2025 tax season with confidence.
What are tips according to the IRS?
The IRS defines tips as optional or extra payments made by customers to employees. These can come in various forms:
- Cash tips: Directly handed to you by customers.
- Electronic tips: Added through credit or debit card transactions.
- Non-cash tips: Items of value like tickets or vouchers.
- Tip-sharing arrangements: Distributions from pooled tips among employees.
Are my tips taxable income?
Yes, the IRS considers all tips to be taxable income. That means that they are subject to tax under the federal income, Social Security, and Medicare. If you receive $20 or more in any month in tips, you have to report all your tipped earnings for that period to your employer.
How should I report my tips to my employer?
You’re expected to report your cash tips to your employer by the 10th day of the following month. This report should include:
- Your name, address, and Social Security number.
- Your employer’s name and address.
- The month or period the report covers.
- Total tips received during that period.
While there’s no mandatory form for this, the IRS provides Form 4070 in Publication 1244 as an option.
Do I need to report non-cash tips?
Non-cash tips, like event tickets or other valuable items, don’t need to be reported to your employer. However, you’re still required to include their fair market value as income on your tax return.
How do I report tips on my tax return?
When filing your individual income tax return (Form 1040 or 1040-SR), ensure you:
- Include all tips reported to your employer, since they must be shown on your Form W-2.
- Report unreported tip using Form 4137, “Social Security and Medicare Tax on Unreported Tip Income.”
This makes sure you pay all the taxes on your tip income.
Are there any proposed changes to tip taxation?
Recently, the disbanding of federal taxes on tips has been discussed. This legislation has backing from high-ranking officials, including President Donald Trump and Vice President Kamala Harris. As things currently stand today, tips are subject to taxation. Remember that any legislative change could become current at any time, in which event your responsibilities regarding your taxes might change.
Key takeaways:
- The IRS treats all tips as taxable income.
- Report cash tips of $20 or more in a calendar month to your employer.
- Report other non-cash tips on your tax return.
- File Form 4137 for unreported tips.
- Watch for any changes in the tax law concerning tips.
When you maintain accurate records and observe the rules just mentioned, you will ensure IRS compliance and avoid any problems during the tax season.
Continue reading:
IRS2Go: where to download and how the IRS app works to file taxes online and get refunds faster
