Money, Tax Payments, Taxes Due
Tips and Taxes
October 16, 2014 - Money, Tax Payments, Taxes Due
The word TAX can have several meanings. At Bullet Proof Your Taxes, the talk is all about income tax…I want you to pay only your lowest legal tax and not a penny more.
The definition I found online that fits is “a compulsory contribution to state revenue, levied by the government on workers’ income and business profits or added to the cost of some goods, services and transactions.” Tax has also been defined as “a sum of money demanded by a government and a burdensome charge.”
What is a TIP? This word also has several meanings. I regularly give tips, secret information and advice in my articles and on my radio show. However, today I am talking about TIPS which is the acronym for To Insure Prompt Service. A tip, and the amount of the tip, is given for a service performed or a service anticipated.
Tips are a matter of social custom which varies between countries and settings. In some settings a tip is discouraged and considered an insult. While in other circumstances, like law enforcement situations, tips are illegal and could be considered a bribe. In most US locations a tip has become expected, but watch your bill because if you are part of a group at a restaurant, a service charge may been added and included in the total bill. You may not want to add any additional tip because the tip will be paid through that service charge. If you add just a single penny, one lone cent to your tip, you are telling the server that you appreciate their exceptionally good service.
For you servers, tips are considered income and are subject to income tax. If your tips are paid by credit card to the establishment, your employer’s policy will determine whether you are paid them daily in cash or whether they are accumulated and included in your paycheck.
Your tips may be paid by your customer directly to you as cash or gift cards or casino tokens or other cash equivalents. If you receive $20 or more in a calendar month while working for any one employer you must report the total (not just the amount over $20) to your employer by the 10th day of the following month. The amount of those tips will then be reported on your W2. There is a special box on the W2 form just for allocated tip income for workers of large food or beverage establishments.
According to the IRS, at least 40% of tips to servers are not reported for taxation. The IRS has done special focus examinations on tip earners. As a server, it is easy to pocket your cash tips and spend them on the way home for groceries, gasoline, etc. You may not even realize you made more money than your paycheck reflects.
If you think those tips are “free” money to save up for something special, think again. The IRS pays special attention to tip income. It is up to you to keep track of your own total income. Remember, all income is taxable except that which we are told is not taxable.