With the deadline to file taxes looming the panic begins to set in, particularly for those who keep track of their own income. Although this includes 1099’d employees, it also includes individuals that receive a W-2 from an employer but also receive tips as a regular part of their income. The protocol for filing this income with the IRS can be confusing and daunting, especially if you are a professional waiter who tips, and tips out, on a daily basis. An outline of how to navigate the “tip reporting” process is an important tool to help alleviate any filing anxiety.

Waitress From Maggie’s
by Mike Cressy

First and foremost, stay on top of the details. The IRS provides a worksheet for keeping a daily record of your tips and your tip allocations to other employees, form 4070A. This form includes columns to record cash tips, credit or debit card tips and tips that were paid out to other employees. It is important to keep these records because although your employer will have a computer-generated record of your credit card and debit card tips, they rely on you to keep a record and report to them both your cash tips and your tip outs to other employees. Keeping this daily record using the form provided by the IRS can help you to stay organized and accurate when reporting your income and can help you to provide your employer with your total income, as well as your net income.

This record keeping is important for several reasons. Those reasons include but are not limited to the following:

a.) Your employer will use your net tips to determine how much to withhold from your paycheck for FICA and Medicare.

b.) Your employer is required to allocate tips if the total amount of tips received by all employees that receive tips does not equal 8% of the gross sales within a given pay period. The allocation amount is the difference between 8% of the total sales and the amount of tips reported.

c.) If you are pooling tips or are tipping out and you live in California, you should catalog the name of the person you are tipping, which can eliminate issues with the illegal practice of “tipping out” to management staff. Managers and supervisors are considered agents of the employer and, as such, are prohibited from sharing tips with employees per CA Labor Code 351.

Next, if you are wondering about the logistics of tip reporting, you may be wondering about deductions in general. Generally, tip-outs are not considered suitable for itemized deductions that you can make on your tax return. Purchasing a uniform and uniform dry cleaning are examples of expenses that are much more likely to make solid deductions. If you are wondering if it makes sense for you to itemize, it might be worth consulting a tax professional to explore your options and to understand your full financial picture.

It is important that employees that rely on tips keep a close eye on their income and remain mindful of the amount of taxes they are paying in relation to the amount of income they are generating. The ebb and flow of tips by season and by the economy means that they can vary quite a bit and waiters and waitresses can find themselves surprised at how much they have earned and subsequently at how much they owe the IRS.

This guest post was provided by the team at W-2Instructions.com. W-2 Instructions is a helpful guide that provides clear explanations on tax obligations for employees and employers.

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