Paying taxes on tips, what are the laws?

If you work in a restaurant, a hotel, a hair salon, or anywhere that you receive tips as part of your salary, you may have asked yourself how you handle those tips at tax time.You may wonder what tips need to be reported and how you pay the taxes on those tips.Basically there is one law when it comes to paying taxes on your tips; you must report all tips, no matter how big or small.Here are some guidelines that will help you keep track of what you make and how to go about reporting those tips at the right times and to the right people.

- The first thing you will want to do is start keeping a daily log of the amount of tips you are making.This will help keep you organized and will be a big help in later processes.Keep track of the amount you make each day and then organize it by months.If you do not keep these logs, it will be hard to know the amount of tips you need to report and, should you be questioned later on, you may become subject to paying penalties and interest.

- Second, you will want to be reporting the amount of money you make in tips each month to your employer.The general rule is if you make $20 or more each month, this needs to be reported to your boss.The company you work for should provide you with some kind of system in which you can easily give them this information.However, if they do not, you will want print off Form 4070 and fill in the correct information.Again, this is very important; if you overlook this step you may be faced with more penalties, such as a negligence penalty and an estimated tax penalty.
- The last and most important step to the process is reporting all tips you have made throughout the year on your income tax return.If you have been thorough in doing the previous two steps, this should be relatively simple.If you have been making over $20 each month and reporting that to your employer, it should all be taken care of when you get your W-2.However, if there were some months that you made less than $20, you will need to report that extra amount at this point.For example, say you made $10,000 in regular salary, plus $5,000 in reported tips, at tax time your forms will show you made a total of $15,000.However, there were two months that you only made $15 in tips.You are going to need to report that extra $30 at this time.This is one of the times that your daily and monthly logs will be extremely helpful.

While this can all seem like a lot of work and maybe a little confusing, you never want to cut corners when it comes to paying taxes the correct way.It is better to take the correct steps that may seem time consuming rather than being left with more fees and penalties at the end.Plus, you will be directly affected in a positive way for reporting the correct amount of tips.For example, your ability to get financed for a new car or house will improve because you will show an increased income.A great guideline to follow is, when in doubt, talk to someone or find a resource that will help you report your tips correctly.There is a Taxpayer Advocate Service that is always available and plenty free online services on the IRS website.