How Tips Affect Taxes in Florida

How Do Tips Affect Taxes Florida Taxes?

Many of us who work in service industries such as restaurants and hotels, depend heavily on tips to supplement our income. Tips are essentially payments customers make at their discretion for services they receive from employees. Tips may be in the form of cash or they may be paid through a credit/debit card transaction. Sometimes, employees may even receive tips in the form of free tickets or other items that have value attached to them. Some businesses have the practice of pooling or splitting tips or some other practice of sharing tips among employees at the establishment.

What Are Your Responsibilities?

If you are an employee who has a tip-paying job, it is necessary that you maintain a daily record of the tips you receive and report all tips to your employer unless it is under $20. It is also crucial that you report all tips on your income tax return. To maintain your daily record of tips received, you may use Form 4070A. In addition, it is also important that you keep a record of the date and value of any noncash tips you receive such as tickets or passes. Even though you may not report these tips to your employer, it is required that you report them on your income tax return.

The Internal Revenue Service requires workers to report all cash tips they get to their employers in a written statement except for any tips that don’t add up to at least $20. Cash tips include everything from customer tips, tips charge through credit/debit/gift cards and tips obtained from other employees through a tip-sharing agreement.

This statement of tips should include details such as the employee’s name, address, Social Security number, period of time covered in the report and the total amount of tips during this period. If you have a tip-paying job, you must use Form 4137 to report the amount of any unreported tip income. This will be included as “additional wages” in your Form 1040 or Individual Income Tax Return.

Some restaurants may include a mandatory 18 percent service charge for large parties. These are not counted as tips and you are not required to report these as tips or include them in your record. But, you are required to pay taxes on such income. Your employer will include these types of payments on your W-2 as earned income, which means taxes will be withheld from your paycheck for such wages earned. How do you distinguish between a service charge and a tip? A payment is a tip and not service charge if it wasn’t mandatory, if the amount was at the customer’s discretion and if the payment wasn’t negotiable.

Contacting an Experienced Lawyer

The penalties for failing to report your tip income can be rather severe. If you fail to report your tip income to your employer as required under tax laws, the IRS may slap you with a penalty equal to 50 percent of the Social Security and Medicare tax you owe on tips that you failed to report. This penalty is charged in addition to whatever taxes you may owe to the IRS. If you have questions or doubts with regard to tips and income taxes or if you feel overwhelmed by tax debt, please contact an experienced Florida tax attorney to examine your options.