If you receive tips in the course of your employment whether cash or included in a charge, those tips are income subject to income tax, social security and medicare taxes and may be subject to State tax.
If you receive $20 or more tips in any one month, you should report all your tips to your employer so that social security and medicare taxes and federal taxes can be withheld.
If you share your tips with other employees, the part shared is not to be reported but you need to keep a log of tips-out.
You must keep a running daily log of all your tip income even if you report all your tips to your employer.
If you do not report your tip income to your employer but you do report the tip income on your federal tax return, you may owe a 50% social security and medicare tax penalty and be subject to negligence penalty. When you do not report your tips to your employer, it places your employer at risk of possible assessment of the employer’s share of social security and Medicare taxes.
Tip reporting may increase your social security credits resulting in greater social security and Medicare benefits when you retire. Tip reporting may also increase other benefits to which you may become entitled, such as unemployment benefits, worker’s compensation, or retirement benefits. Addiﾭtionally, a greater income may improve financing approval for mortgage, car, and other loans.Check with your employer for other increased benefits (based on pay) that your company may offer, such as life insurance, disability payments, and the right to purchase stock options.
I created this blog to help understand certain basic aspects of U.S. tax law. Of course, each situation is unique and nothing that is on this site will ever replace the expert advice of a tax professional.
Please do not hesitate to contact me should you have any question