Many waitresses earn the majority of their their income from tips. These tips are taxable as ordinary income -- you are responsible for reporting your tips to your employer, and your employer is responsible for withholding taxes on them from your paycheck. This IRS estimates, however, that as much as 84 percent of tip income goes unreported.
You must keep a daily tip log on Form 4070A. Form 4070A requires you to list your daily tip amounts, but not individual tips. Although you don't need to submit this form with your tax return, you need to keep it in case you are audited. You must record your monthly tip income on Form 4070 and submit this form to your employer. You may subtract from your monthly tip income any amounts you paid out to other employees -- pursuant to a tip-sharing plan, for example -- leaving only your net tips.
Reporting Tips to Your Employer
If you receive at least $20 in tips in any month from a single employer, you must report all of your tips to your employer. Your employer will withhold federal income, Social Security and Medicare taxes on this income from your paycheck. Your report must be in written form, and you must deliver it to your employer by the 10th day of the month following the month you are reporting. "Tips" includes both cash tips, tips added to the customer's bill, and even tips you receive from other employees.
Reporting Your Tips to the IRS
You must report your total net tips on Form 1040, and submit it to the IRS. When you calculate your tip income, however, you must include any tips that you didn't report to your employer because you earned less than $20 that month. You must figure your taxes on this amount using Form 4137, since your employer didn't withhold taxes from it. These taxes will either increase your tax bill or decrease the amount of your refund. You must submit Form 4137 together with Form 1040 if you have any unreported tip income.
Penalties for Under-Reporting Tips
If you under-report your tips and the IRS catches you, it can add penalties and interest to your tax bill. The IRS can impose a fine of 0.5 percent per month on overdue amounts, until the total penalty reaches 25 percent of the unpaid amount. It can also impose a fine for civil fraud that can reach as high as 75 percent of the overdue amount. The IRS adds interest to unpaid taxes and penalties, at a periodically determined rate that is based on the federal short-term interest rate. In an extreme case, you might even be charged with criminal tax evasion.
- Internal Revenue Service: Tips – Withholding and Reporting
- Internal Revenue Servce: Four Tax Tips Regarding Tip Income
- Internal Revenue Service: Employee's Daily Record of Tips and Report to Employer
- Alvin Brown and Associates: Background Information on IRS Tax Penalty
- Tucker Law Group: Restaurant Owners Must Withhold All Payroll Taxes on Employee Tips
David Carnes has been a full-time writer since 1998 and has published two full-length novels. He spends much of his time in various Asian countries and is fluent in Mandarin Chinese. He earned a Juris Doctorate from the University of Kentucky College of Law.