Are You working in a Restaurant, McDonald's or KFC ? Do you receive Tips from your customers or employers? Then Please read the following.
All tips you receive are income and are subject to federal income tax. You must include in gross income all tips you receive directly, charged tips paid to you by your employer, and your share of any tips you receive under a tip-splitting or tip-pooling arrangement.
The value of noncash tips, such as tickets, passes, or other items of value are also income and subject to tax.
Reporting your tip income correctly is not difficult. You must do three things.
1.Keep a daily tip record.
2.Report tips to your employer.
3.Report all your tips on your income tax return.
Why keep a daily tip record? You must keep a daily tip record so you can:
*Report your tips accurately to your employer,
*Report your tips accurately on your tax return, and
*Prove your tip income if your return is ever questioned.
How to keep a daily tip record. There are two ways to keep a daily tip record. You can either:
*Write information about your tips in a tip diary, or
*Keep copies of documents that show your tips, such as restaurant bills and credit card charge slips.
You should keep your daily tip record with your personal records. You must keep your records for as long as they are important for administration of the federal tax law.
Why report tips to your employer? You must report tips to your employer so that:
*Your employer can withhold federal income tax and social security and Medicare taxes or railroad retirement tax,
*Your employer can report the correct amount of your earnings to the Social Security Administration or Railroad Retirement Board (which affects your benefits when you retire or if you become disabled, or your family's benefits if you die), and
*You can avoid the penalty for not reporting tips to your employer (explained later).
What tips to report. Report to your employer only cash, check, debit, or credit card tips you receive.
If your total tips for any one month from any one job are less than $20, do not report the tips for that month to that employer.
If you participate in a tip-splitting or tip-pooling arrangement, report only the tips you receive and retain. Do not report to your employer any portion of the tips you receive that you pass on to other employees.
Do not report the value of any noncash tips, such as tickets or passes, to your employer. You do not pay social security and Medicare taxes or railroad retirement tax on these tips.
How to report?. If your employer does not give you any other way to report tips, you can use Form 4070. Fill in the information asked for on the form, sign and date the form, and give it to your employer. To get a 1-year supply of the form, ask the IRS or your employer for Publication 1244.
If you do not use Form 4070, give your employer a statement with the following information.
*Your name, address, and social security number.
*Your employer's name, address, and business name (if it is different from your employer's name).
*The month (or the dates of any shorter period) in which you received tips.
*The total tips required to be reported for that period.
You must sign and date the statement. You should keep a copy with your personal records.
Your employer may require you to report your tips more than once a month. However, the statement cannot cover a period of more than one calendar month.
Electronic tip statement. Your employer can have you furnish your tip statements electronically.
When to report? Give your report for each month to your employer by the 10th of the next month. If the 10th falls on a Saturday, Sunday, or legal holiday, give your employer the report by the next day that is not a Saturday, Sunday, or legal holiday.
Example 1: You must report your tips received in April 2008 by May 12, 2008. May 10th is a Saturday, and the 12th is the next day that is not a Saturday, Sunday, or legal holiday.
Example 2: You must report your tips received in May 2008 by June 10, 2008. Final report. If your employment ends during the month, you can report your tips when your employment ends.
Penalty for not reporting tips. If you do not report tips to your employer as required, you may be subject to a penalty equal to 50% of the social security and Medicare taxes or railroad retirement tax you owe on the unreported tips. (For information about these taxes, see Reporting social security and Medicare taxes on tips not reported to your employer under Reporting Tips on Your Tax Return, later.) The penalty amount is in addition to the taxes you owe.
You can avoid this penalty if you can show reasonable cause for not reporting the tips to your employer. To do so, attach a statement to your return explaining why you did not report them.
Giving your employer money for taxes. Your regular pay may not be enough for your employer to withhold all the taxes you owe on your regular pay plus your reported tips. If this happens, you can give your employer money until the close of the calendar year to pay the rest of the taxes.
If you do not give your employer enough money, your employer will apply your regular pay and any money you give to the taxes in the following order.
1. All taxes on your regular pay.
2. Social security and Medicare taxes or railroad retirement tax on your reported tips.
3. Federal, state, and local income taxes on your reported tips.
Any taxes that remain unpaid can be collected by your employer from your next paycheck. If withholding taxes remain uncollected at the end of the year, you may be subject to a penalty for underpayment of estimated taxes. See Publication 505, Tax Withholding and Estimated Tax, for more information.
How to report tips? Report your tips with your wages on line 1 of Form 1040EZ or line 7 of Form 1040A or Form 1040.
What tips to report? You must report all tips you received in 2007 on your tax return, including both cash tips and noncash tips. Any tips you reported to your employer for 2007 are included in the wages shown in box 1 of your Form W-2. Add to the amount in box 1 only the tips you did not report to your employer.