If you work in a service where you get tips, guess what? The IRS expects you to report them and pay taxes on them.
Tips paid to waitresses, bartenders, barbacks, and so on are a red flag with the IRS, and always have been. Since tips tend to be given in cash form, the potential for “forgetting” to report them is particularly high – or the IRS seems to think so, and has shown a generally aggressive attitude on the subject. If you indicate you are a waitress or bartender on your tax return, but fail to report any tip income, it could be audit time!
The Internal Revenue Service takes a very simple approach to tips. It views all tips you make in your job as taxable income that must be reported and for which taxes must be paid. Put another way, the IRS has a simple but brutal view towards tips.
Now it is important to understand, tips can come in many different forms – some are received directly from customers, while others are automatically added to a customer’s bill. The IRS takes the position you must report and pay taxes on both amounts. This also includes taxes you earn through any group, where all tips are collected together and then split amongst the employees. Additionally, the IRS also takes the view that any non-cash tips, such as tickets to a sporting event for example, are also income that should be reported and taxes paid on. In other words, the Internal Revenue Service gets you “coming and going”.
To make things a little more painful, the Internal Revenue Service requires you to take specific steps in reporting tips. If your tips total $20 or more in any calendar month from a single job, you are required to report the total earned to the employer by the 10th day of the next month. The employer is then required to withhold federal income tax, social security and Medicare taxes from your paycheck. Keep in mind that the failure to do so can ultimately lead to the placement of a 50 percent penalty on your taxes. Obviously, the IRS is fairly serious about getting its money!