If gratuities are part of your work, then the 10th of the month is an important tax date for you. It's the day — or the next businesses day if the 10th falls on a weekend or holiday — that you must report your tip amount for the previous month when it totals $20 or more.
The Internal Revenue Service requires these reports because the tax code considers all types of tips as discretionary, fully taxable income.
Wisconsin workers, however, may soon get a break on the state tax level when it comes to some of their tips. A proposal by a couple of Badger State legislators would exempt cash tips from the state's income tax.
"This bill, I think, is just common sense in terms of not taking money away from people who need it," bill sponsor State Sen. André Jacque told WFRV-TV, Green Bay's CBS affiliate.
"It's extra money in their pocket, extra money they are able to use to support themselves and their families and the local economy," added Jacque.
Only one type of tip covered: Cash is king in the Wisconsin measure.
The bill would make only those bills and coins left on the table or slipped into a hairdresser's hand free from the Wisconsin tax collector.
Other forms of tips, notably the amount added on credit card slips, still would be taxed.
That, however, is part of the rationale behind the bill.
Jacque admits cash tips are probably not often reported, but says it should be part of a discussion on how to incentivize people to join the state's growing tourism workforce.
To get businesses on board, the proposal would still let businesses to claim a tip credit. That would them to pay employees as little as $2.33 an hour as long as the hourly wage plus tips add up to at least $7.25 an hour, which is the federal minimum wage.
Joining Jacque, a Republican from of De Pere, in supporting the bill is State Rep. Cody Horlacher, another GOP lawmaker from Mukwonago. Jacque says, however, that beyond official sponsorship, his bill has bipartisan support and that a vote on it could take place in the coming months.
Federal tax on tips unaffected: If enacted, the measure would make Wisconsin the first state in the country with a state tax exemption for cash tips paid to service workers.
Wisconsin workers, however, still would be required to report all their tips as taxable income on their federal returns.
If your job includes tips as part of your compensation, here's a quick refresher on what Uncle Sam says you must do when it comes to taxes on gratuities.
The IRS considers as taxable income a wide variety of tokens of customer appreciation, including:
- Cash tips received directly from a patron or client.
- Tips from customers who leave a tip through electronic settlement or payment. This includes a credit card, debit card, gift card or any other electronic payment method.
- The value of any noncash tips, such as tickets, or other items of value.
- Tip amounts received from other employees paid out through tip pools or tip splitting, or other formal or informal tip sharing arrangement.
Just to make sure we all understand IRS tax speak, cash tips include not just actual currency, but also charged tips distributed to an employee by his or her boss and tips received from other employees under any tip-sharing arrangement.
The one area that is not reported as a tip is service charges, such as the percentage of the bill automatically added to customer's check for large parties and then distributed by your employer to you and other staff.
Specific tips tax tasks: Your tips obviously are important to Uncle Sam and, depending on where you live, your state tax collector, as operating revenue. Employees' cash and non-cash tips are income and are subject to income taxes.
The money also plays a role in workers' future retirement security. The IRS points out that all cash tips received by an employee in any calendar month are subject to Social Security and Medicare taxes.
To help workers comply and ensure that the U.S. Treasury gets its tips due, the IRS spells out some specific tip reporting responsibilities for workers.
It says that an employee who receives tips must do three things:
- Keep a daily tip record. The IRS recommends you use Form 4070A, Employee's Daily Record of Tips, included in Publication 1244. In addition to the information asked for on Form 4070A, you also need to keep a record of the date and value of any noncash tips you get, such as tickets, passes, or other items of value. Although you do not report these tips to your employer, you must report them on your tax return.
- Report tips to the employer. The report to the employer must be in a written form that shows all cash tips (note the tax-speak elaboration earlier) received when the monthly total is $20 or more. The monthly tip statement must be signed by the employee and must include the worker's name, address and Social Security number; employer's name and address; month or period the report covers; and total of tips received during the month or period. You can use Form 4070 or, if provided by your employer, an electronic system to report tips.
- Report all tips on an individual income tax return. This is pretty self-evident. But in addition to the standard Form 1040 and, under Tax Cuts and Jobs Act changes, Schedule #, a worker who gets tips also must file Form 4137, Social Security and Medicare Tax on Unreported Tip Income, to report the amount of any unreported tip income to include as additional wages and their employee share of Social Security and Medicare tax owed on those tips.
Yeah, that's a lot of tax work. It almost makes being a restaurant server look easy. Almost.
But if you get in the habit of tracking and reporting your taxable tips, it should become routine. And doing so will mean that you won't have to hassle with follow-up IRS questions about your well-deserved gratuity earnings.
You also might find these items of interest:
- Labor Day largesse: Waitress gets $10,000 tip
- Restaurant tips rule change could short-change wait staff
- Until Ron Paul is president, don't forget to report your tip income