PAYING TAXES ON TIPS
If you have ever been employed in a hotel, restaurant, hair salon, or
anywhere that tips are received as a portion of your pay, you probably have
wondered how you should deal with these tips when it comes time to pay your
taxes. When it comes to paying taxes on the tips you have received, there is
one law and this law states that you you are required to report all tips
received to the IRS regardless of how small. Read more about the laws for
paying taxes on tips
here. Below is
some information that will assist you in keeping tabs on what you earn and
how to proceed with reporting those tips.
- A good idea would be to develop a log that you record your daily tips
into. This organizing will be of great assistance to you when it comes time
to tally your tips. We suggest logging each day you work and separate by
months. If you fail to keep any logs or records, it will be all but
impossible to remember the amount of tips that you are going to be required
to report. And if you report the wrong amount, it is possible that you will
be faced with having to pay additional penalties and interest.
- Equally important to the above is that you report the amount of money you
earn in tips to your employer every month. Typically, you are going to want
to report tip revenue to your employer if more than $20/month is earned.
Whoever you work for should have a system in place that will make it easy
for you provide them with this data. In the event that they do not, you can
Form 4070. If you fail to report your tip earnings to your employer you
are subject to the 'negligence penalty' and an estimated tax penalty.
- Lastly, and most importantly, is that you report all your tips earned
throughout the year on your income tax return. If you have been following
the previous two steps throughout the year, this step should be very easy
for you. If you have been reporting your monthly earning to your employer
all year, they will provide with you an accurate W-2. In the event
that there were a few months during which you earned less than $20, you are
going to have to report this additional amount. Suppose you earned $20,000
in normal salary, plus $7500 in reported tips, at tax time your forms are
going to reflect that you earned a total of $27,500. However, there were
three months during which you only earned $10 in tips. At this point you are
going to have report this additional $30. This is when the importance of
keeping detailed records comes into play.
This may all appear like a great deal of work and will likely be confusing
the first year. It is important that you don't take short-cuts when paying
taxes. It is wiser that you take the time in utilizing the right steps as
opposed to doing things wrong and having to pay additional penalties and
fees. In addition, you will benefit for reporting the right amount of tips
on your income tax return. How? Because your salary will be higher as a
result which can equate to getting approved for credit and loans that you
would not be able to if your salary did not reflect your tip income. In the
event you have questions about paying taxes, it is suggested that you
consult with a local CPA (certified public accountant). In addition you can
visit the IRS' website and have all of your questions answered.
Income Tax Loans
- Helpful in the event you don't the funds available when it comes
time to pay your taxes.
Advice for Paying Income Taxes - Learn the difference
between W-4s and W-9s, etc..
Avoiding an Audit - Don't set off red-flags on your tax
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