What You Need to Know About Claiming Tips on Your Tax Return

For many workers, tips are an important part of their income, as many companies and businesses rely on them in order to cover the wages for their staff. If we count on tips as part of our income, we need to report them to the IRS, as we need to cover our corresponding taxes for Social Security and Medicare based on tip income we receive. In order to help you take care of this process, we have put together a short list of steps and tips you need to follow when claiming tips on your tax return. These include keeping a monthly record, documenting shared tips, checking for tax withholding balances, and filing a form for unreported income.

Keep a Monthly Record on Your Tip Income

One of the most important aspects you need to keep in mind when claiming tips on your tax return is that the IRS requires you to report your total tip earnings to your employer on the 10th of every month. Most employers have a specific process to follow for reporting tip income, but if yours doesn’t, you can do it by filing Form 4070. This way, your employer will be able to cover income withholding from your tip income. Remember that if you fail to report this income, you can be subject to a penalty equal to 50% of the Social Security and Medicare taxes you are not paying.

Document How Much Tip You Share with Other Employees

In many places, it is common for employees to share or pool tips with other employees, and we must remember to document this when claiming tips on your tax return. This is because it can help you reduce the amount of tip income you need to report. Since every company might work with different processes of tipping structures, we need to keep a very detailed record of how much we got and how much we shared. For example, if we received a total of $200 in tips, but need to share $50 with another staff member, we should only report $150 as tip income.

Check Your Tax Withholding on Your W-2 Form

When it comes to claiming tips on your tax return, we must pay a lot of attention to tax withholding. In most cases, your employer will be in charge of taking your tax withholding share and reporting it to the IRS. However, you might not have earned enough in tips and wages to cover your withholding. If this were the case, you will be able to find the balance you owe in your W-2 Form. If it shows a significant balance, you might be subject to several tax penalties after submitting your returns.

Include Unreported Tip Income on Form 4137

If there were some months on which we didn’t receive more than $20 in tips, or if we received non-cash tips, we need to fill out Form 4137. This form will allow us to include any unreported tip income and wages we didn’t have the chance to report during the year. Also, the form comes with instructions that will help you calculate the amount of Social Security and Medicare tax you must cover on your unreported tip income reports.

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