For those working in the service industry, tips are often a vital part of their income. Like most forms of income, tips are taxable. Therefore, it’s also vital that people understand the tax obligations that come with tip income. Here’s some information to help taxpayers report tip income so they don’t receive a surprise tax bill.
Taxpayers must include all tips they receive in their gross income. This includes:
- Tips directly from customers.
- Tips added using credit, debit or gift cards.
- Tips from a tip-splitting arrangement with other employees.
The value of non-cash tips, such as tickets, passes or other items of value is also income and subject to tax.
Three things can help taxpayers to correctly report their tip income.
- Keep a daily tip record.
- Report tips to their employer.
- Report all tips on their income tax return.