Q: Tax Playa, do I have to pay taxes on tip income?
Stephanie, Cranston RI
A: Tips for waiters and waitresses are taxable in the same way that wages are taxable. For any month in which you receive more than $20 in tips, income and payroll tax must be paid...
For more information on tip income, see IRS Publication 531, Reporting Tip Income.
Since most everyone would earn more than $20 a month in tips, I'll just proceed under the assumption that all tips are taxable.
In order to properly-account for tips, you must report your tips to your employer by keeping a log. In practice, this is done a majority of the time for waiters because of credit cards. With cash transactions, though, you're on the honor system.
If you don't report tips to your employer, you may be subject to a fine equal to 50% of the FICA tax owed. Additionally, your employer may participate in a tip rate determination agreement (TPDA) with the IRS. If 75% of employees consent, the employer can assume that the tip rate is a certain percentage of base pay. This percentage is based on the type of establishment and what comparable businesses can expect to gross and tip.
If you don't report all your tips to your employer, you may have to pay your FICA tax on your individual tax return. This is most often done when the tips reported to your employer do not equal or exceed 8% of food and drink sales. In this case, your employer is required to allocate tips to you sufficient to get you up to that 8% tip level. You then have to pay income and FICA taxes on these allocated tips by filing Form 4137 with your return. In practice, this only happens if there is some collusion on the part of employees not to report all tips given.
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