Can a Waitress Put Tips on Her Taxes?

Waitresses must pay federal income taxes on the value of goods and services received as tips.

As a waitress, your tips are taxable to the same extent as any other income, whether you report them to your employer or not. Because of widespread abuses, the IRS takes a close look at tip income and is likely to audit you if you report suspiciously low tip income.

Types of Tips

The IRS recognizes three different types of tips: cash tips, noncash tips and allocated tips. Cash tips are divided into reported and unreported tips. If you make more than $20 in tips in a month, you must report them to your employer, otherwise you don't need to report them. Noncash tips are paid in goods or services, such as concert tickets, and you don't need to report them to your employer. The IRS assumes that you earn tips of at least 8 percent of your monthly sales and will allocate this much to your income even if you don't report any tips. If you report at least 8 percent of your monthly, you will have no allocated tips.

Payroll Taxes

When you report tips to your employer, your employer adds the amount to your paycheck when calculating withholding taxes. Your employer withholds 1.45 percent for Medicare taxes and 6.2 percent for Social Security taxes, and withholds estimated income taxes at the appropriate rate according to your tax bracket. Your tips are taxed at the same rate as your salary.

Unreported Tips

You must report all of your tips to the IRS, even if you don't report them to your employer. If you receive noncash tips, you must report them at fair market value -- the face value of concert tickets, for example. To report them on form 1040, simply add your unreported tips to the amount your employer listed on your form W-2 and express it as a single amount. You must also calculate Medicare and Social Security taxes on your unreported tips using form 4137.

Paperwork

You may use form 4070 to report tips to your employer, although you are not required to use this form as long as you report your tips to your employer in writing. You may also use form 4070A to keep personal records of your daily tips in case of an IRS audit. To report your tips to the IRS, you must file form 1040 and form 4137. You must also include the form W-2 that your employer issued you.

References

• IRS.gov; Topic 761 - Tips -- Withholding and Reporting; March 2011
• IRS.gov: Publication 531 (2010), Reporting Tip Income
• IRS.gov; Publication 1244; Employee's Daily Record of Tips and Report to Employer; August 2005

Resources

• IRS.gov: Form 4137