Tipping accounts for a major portion of many people's incomes, whether they work in service, hospitality or elsewhere. If that includes you, it's important to know how to handle that sort of income on your tax return -- even though some politicians are looking to change things dramatically.
A 2023 survey from the Pew Research Center found that around 43% of Americans had experience working at a job where they received tips in addition to standard hourly wages, especially younger respondents, those from lower income homes and women. That means there are many people who need to know how to handle their tip income at tax time.
While the less formal nature of tips compared with paychecks might lead you to suspect that they don't need to be reported to the IRS, they very much do. In fact, not doing so can land you in hot water and result in some unpleasant penalties.
Read on for all the details you'll need about taxes on tips. For more tax tips, see how you can track your refund and find out why the IRS hiring freeze might not be what delays your tax return.
Do I need to track tips for my tax return?
Yes, you do. You very much need to report the income you made from tips on your tax return. On its website, the IRS advises that you keep a "daily tip record" in order to have the full amount ready to report come tax season.
You are also advised to let your employer know how much you're making in tips. This allows them to have an accurate sense of your income level, so that they can withhold the correct amount from your standard paycheck.
Are tips taxed differently than normal income?
In general, no, tips are not taxed at a different rate than your standard wages. Your income tax rate would change only if your income from tips pushed you into a higher income bracket, which would change the rate applied to your overall income.
If the amount of tips you received in a given month is less than $20, however, you don't need to report that money as income on your taxes.
What happens if I don't report my income from tips?
If you're thinking that you can keep your tip income under the table, think again. If the IRS catches you withholding tips from your tax return, you'll be hit with a penalty requiring you to pay "equal to 50% of the Social Security, Medicare, Additional Medicare, or railroad retirement taxes you owe on the unreported tips" on top of the amount you'll owe in general, according to the agency's website.
The agency has a variety of methods used to catch "underreporters" who don't report all of their income, such as monitoring your bank statements or e-commerce activity. Better safe than sorry.