If your job involves receiving tips from random customers, the struggle lies on whether or not your tips are taxable. You might have even wondered if it even makes sense to file taxes for something that has been given to you wholeheartedly.
Here are some questions that you might have when we talk about filing taxes for tip income?
1. Is it bad when I do not report the tips I receive?
The answer is YES. Tips are not just extra cash. They are actually part of your income. And not declaring your income will be sanctioned by the IRS as tax evasion. Just so you know, the IRS is very serious in inflicting punishment to those who evade taxes.
2. What type of form should be filled up when reporting my tips?
Dealing with IRS paperwork can be tedious. That is why we tend to avoid doing this stuff. However, the good news is that the agency has designed its forms so that you can quickly report your situation. The IRS has everything you need to go through the process.
For tip income, you can fill up your form 1040 and report to line 7 when you return. You can also check your W-2 if you are consistent in reporting your tips to your employer. You may also use form 4070 to track the tips you report to your boss as this will constantly remind you of your tip record.
3. Is a service charge considered a tip?
In some restaurants, service charges are often included in larger parties. If you come to think of it, it is the restaurant’s way of forcing a tip on a large group. And since it is mandatory, a service charge should not be counted as an extra income. It has to be placed on your wages, not just a mere tip. If the customer has the freedom to leave some cash or not or has the choice to pick the person he wants to give the cash to, then it is considered a tip. If these are not met, then basically, it is a service charge.