Reporting Tip Income - The Jill and Jason Show
Hey, welcome .It's "The Jill & Jason Show," the show that helps you live, feel, and act smarter. And do it with style. I'm Jill. So I guess it won't surprise you that I'm Jason. And today's topic is reporting your tip income. Right why you got to do it what's the best way to do it, and what's in it for you.
Now, we're going to be answering your questions about the rules. And you'll learn how you can get a free tool from the IRS that makes the job easier.
Wait. Did I hear "free"? You heard "free." I like free. And we've got camera crews posted all over the country. We're going to be answering questions via remote for a lot of people who earn their livings from tips.
Now, right now, Jill, we've got a taxi driver named Sean. Say hello, Sean. Yeah, hi. We've also got Vi, a waitress in a busy diner. Oh, hi Bill, a bartender at a big hotel. Hey. Here's an interesting occupation --a blackjack dealer from a very famous casino...Who. That's Nancy...and Shantay, a hairdresser.
Now, all of them make part of their living from tips. In fact, this show is for everybody who gets part or all of their income from tips. That's barbers, bellhops, folks who park cars, skycaps, redcaps, hotel housekeepers.
And now let's get started with Sean, the taxi driver, who has the first question about tipping. So, Sean, what's your question? Yeah. I have a question. Like you said, I drive a cab. I heard from some of the guys I got to report every tip I get. Is that really so?
That is 100% correct, Sean all tips are taxable under the law. They're just like wages, which means you've got to report them. Every last thing I get? Oh, great. Well, what's in it for me? Well, Sean, I'm glad you asked that question. There are a lot of good things in it for you. First of all, you're gonna retire one of these days, right? Well, yeah. I'd like to, when I get old. So? Well, the more tip money you report, the more money you can get from Social Security when you retire, because your Social Security payments are based on the wages you earn and report, and tips are considered wages under the law.
Okay, pay attention now, because anyone whose employer has bought a 401(k) plan ought to listen up to this next point. Okay, now. Everybody listening? Good. The more tip income you report, the more you're permitted to contribute to your 401(k), which will make you even more comfortable when you're retired.
Again, the reason is the same. Tips are considered wages under the law. The more wages you earn, the more you're allowed to put into your 401(k). Well, my retirement's a long way off. Well, that's good. You'll have more time to build for really comfortable retirement years. You know, it's never too soon to get started.
Maybe I could get a little place down at the beach, huh? Someplace warm, like Florida, maybe. Even the thought of that makes me feel warm. Well, hey, Sean, don't run off and start looking at Florida real-estate ads yet, because we want you to know that there are even more benefits to reporting all your tip income.
For instance, suppose the boss goes belly-up and you're out of a job. Well, I know I could collect unemployment insurance for a while. Good idea. Excellent idea, but guess what.
The amount of unemployment insurance you get is based on your salary plus your tip income .Remember, tips are taxable. And they are considered wages under the law. Yeah, yeah. I heard you the first two times.
We can't say it enough, Sean, because the more tip income you report, the more unemployment insurance you can get, up to the maximum amount allowed in your state. And listen, Sean, don't forget workmen's compensation .Did any driver you know ever get hurt in an accident?
Oh, yeah. For sure, I mean, if you're out there driving all day long, things can happen. I had a couple of friends that got hurt so bad they couldn't work. They ended up on workmen's comp for a long time. Well, keep that in mind, Sean, because the more tips you report and pay taxes on, the more workmen's compensation you can receive if you ever need to claim it. By the way, Sean, do you have a special ambition? I mean, would you like to own your own home one day or your own business or maybe you'd like a fancy car, the kind you need lots of money to finance?
Hey, what are you trying to say here that I'm not entitled to have a dream? I mean, sure, I'd like to own a home and my own taxi business. Is there something wrong with that? Not at all. The good news is reporting all your tips could help you with your dream.
That's right. You see, tips are income, just like salaries, so the more tip income you report to the IRS, the better you look to the bank when you come in to borrow money, which means you might be able to get a bigger mortgage and own a bigger home.
Or borrow for a nicer car. Or raise the money to own your own taxi more easily. Hey, I like that .I like that a lot. Okay. So, it pays to keep in mind that benefits like Social Security, unemployment, or workmen's compensation, not to mention your credit standing, are all based on the wages you earn and report, and that includes your tips.
I think you're gonna make your dreams come true, Sean. Best of luck and listen, drive carefully okay. Jill, let's go to our waitress. Now, she's just finished her shift in the diner where she works, and I'm told she's a little bit upset. So, let's hear what's on her mind.
Vi, are you there? Yes, I'm here, and I've been listening to what you were saying. I'm not sure I like what I'm hearing. Do you mean that if I get a buck tip and get to keep only 60 cents of it because the busboy gets part of it that I still get taxed on a buck?
That's not fair. I mean, that's not fair. Do you know what I mean? Oh, yes. I know what you mean, for sure .And so does the IRS, which is why the IRS wants to help you make certain you're taxed only on the tip income you get to keep. They want to keep things fair. There's even a law that helps you prove what you keep and what you give away.
The law says that you have to make a record of tips. Show her the little book, Jason. Oh, yes. Yep. This is the little book. It's called "Publication 1244." The IRS puts it out as a service to all the people who need to keep a record of their tips, which is everybody who gets tips. It's a daily record of tips and a report to your employer. It's a great little tool for keeping track of your tips, and it's free.
Let me show you how it works. Inside, there are two forms. This is Form 4070A. You don't have to remember all the numbers. Just remember it's your daily record of tips. Now, look how simple it is. Each time you get a tip you write the date here. Now, let's say I just got a $2 tip in cash. Well, I just write $2 in this column.
And if you get a credit-card tip, you write it in this column. And if you pay part of your tip to another person, that information goes right here. Easy, Vi? Yeah, but I get lots of tips. Are they all gonna fit in that little, itty-bitty book? No problem. You got lots and lots and lots of spaces and lots and lots of pages. And you can always get extra books free.
The IRS is happy to give them out. Okay, but does that mean that there's a law that I have to carry that little booklet around with me? No, but it's a good idea to keep it handy where you work. What the law says is that you have to keep sufficient proof of the amount of tips you receive during the year .Right, you can use other types of record books a school notebook, for example as long as it contains all the information listed in this book for example, your name, the name of your employer, the date and amount of tips you receive daily, tips you receive from credit-card charge customers that got paid out to you by your employer.
Also, you need to record the value of any non-cash tips you received, such as tickets or passes to the ball games or other items of value. And don't forget to write down the tips you shared with other employees and remember to record the names of these employees. That way, if you only kept 60 cents out of a dollar tip, you only have to pay taxes on the 60 cents, not the whole dollar. Oh, well, I sure feel a whole lot better about that.
Okay, but now, don't go away yet, because at the back of the book, you'll find another form called 4070. Just remember it as your report of tips to your employer. Once a month, you add up the tips you got. The total for cash tips goes here, the total for credit-card tips goes here, tips you pay out to other employees here, and there are a few other simple questions to answer.
Sign the form and give it to your employer. Make sure you do that by the 10th of the next month, or, in some cases, your employer may ask for it more often. And that's all there is to it. Well, that doesn't look too hard. Now, you said that booklet is a free service from the IRS.
How do I get it? You or your employer can get them. You just call toll-free Oh, you might want to write this phone number down 1-800-TAX-FORM.Okay, you got that? 1-800-TAX-FORM. We've got another question now, this one from Bill, who works as a bartender at a pretty fancy hotel.
That's a very interesting job, Bill. I bet all kinds of people tell you their stories. So, what's your story? Well, not exactly my story, but there's this guy I know. He's also a bartender. He was telling me listen, I'm not saying I do this or that he did this, but let's just suppose somebody pocketed some tis and didn't tell anybody didn't report it to the boss, didn't report it to the IRS.
I mean, what could possibly happen? Ouch, should I tell him, Jason, or will you? Bill, you'd better pay attention to this and, uh...tell your friend. Not reporting your taxes can get pretty expensive in the long run. First of all, sooner or later, most failures to report taxes get discovered. And when that happens, your friend will have to pay up in full.
Now, that means not only federal tax, but also Social Security taxes, Medicare taxes, and, in some places, state and even city income taxes. That's just the beginning, because there is also a uh-oh. Here comes the "p" word .Uh-huh. I was afraid of this. Yep, the "p" word. "P" is for "penalty." Your friend could be hit with a penalty of 50% of the Social Security and Medicare taxes he owes.
Plus, your friend could owe a penalty equal to 20% of the income taxes on his tips. Plus...in some cases, your friend might owe interest for all the years he didn't pay up. I mean, it could all add up to thousands of extra dollars. So, it's a whole lot cheaper to just report your income and pay your taxes in the first place.
And then if it turns out that your friend is deliberately not reporting wages over quite a bit of time...Who, me? Not me. I just said that this friend of mine heard about a guy. I understand that, but if some person with a job that depends on tips is really into not reporting his tips and not paying the taxes, well, that's against the law.
I think enough's said about that, Jason. Yeah, but why do I have to report my tips to my boss, and why does the boss withhold part of my tip income? A simple reason, Bill. It's the law. But let's think about what's in it for you when you do report your tip income. If your boss holds roughly the right amount of your pay for taxes, you don't have to worry about getting hit with penalties or interest, the kind of payments that could really have you scrambling to come up with money.
Incidentally, your employer may be part of a program designed to help you report your tips accurately. Now, this all started back in 1993. The IRS began something called TRD/EP, or "Tip Rate Determination and Education Program." Its purpose is to help both employers and employees comply with the law industries where tipping is customary.
The program is voluntary, but a lot of employers are going for it because it helps them get their employees to report tip income more accurately. There are two options. TRDA stands for "Tip Rate Determination Agreement." That's the name of one of the options. The other is TRAC -- T-R-A-C -- for "Tip Reporting. Alternative Commitment." Incidentally, your boss may require you to sign a paper to participate in the TRDA agreement.
Your employee can tell you in detail whether TRDA or TRAC affects you and how the program works. What's important is that both programs are designed simply to make sure everybody pays a fair share of taxes based on how much they really got in tips.
You still need to keep written records, like that little booklet we showed you. But TRDA and TRAC are ways of helping everybody to report their income accurately, including employers, without as many lengthy IRS examinations as there used to be.
I want to go on to another subject, Jason, because I've always dreamed of working, for just a little while, as a Las Vegas casino dealer the bright lights, the people from all over the world, he buzz in the casino, the excitement when somebody wins big.
You know, I hear that once in a while, big, big winners become big, big tippers. Now, I mean, really big. Now, that wouldn't be part of your dream, too, would it, Jill? Who, me? yeah nah okay.
My dream is on my day off, I happen to slip a little money in the slot machine and buckets and buckets of silver dollars fall out. Oh, that'll be the day. I can dream, can't I yeah. Well, anyway, we have a casino blackjack dealer here. So, Jason, meet Nancy. Hi, Nancy, I bet you see lots of excitement working in a casino. I sure so, especially when one of the players wins big, you've got it right. There is cheering and jumping up and down and screaming. I bet that's when you get the best tip.
It is and that's why I have one very simple little question. See, people don't tip me in money. They usually just flip you a chip. Or if you get a high roller, hey push a whole little stack of chips your way. That would make me feel real chipper. So, what's the question, Nancy? Well, since they're only chips and not money, do I really have to report the chips as tips?
Ooh, nice try there. I think that's what they call wishful thinking, Nancy the impossible dream. Go ahead, Jason. Break it to Nancy gently. Well, it's really very simple. A chip is still a tip. And in a casino, a chip is definitely an item of value.
Remember all those penalties we mentioned to Bill the bartender? Remember all that back interest? Well, the more tips you don't report, the more the penalties and the back interest. So, just think of a chip as another form of money. So is a customer's check. So is a credit-card charge. And all of those things count as tips.
Jason, let's move along. We've got a woman with another question on tipping. She works as a hairdresser, right, Shantay? Yes, I have a question. I only work here two days a week part-time, you know and I don't wait on tables where you get customers that are mostly strangers.
I do hair, I mean; I get to know my customers personally. So, my tips feel more like gifts from a friend than something they're paying me. It's like they're saying, "You did such a beautiful job on my hair. "I'd love to run out and buy you a big bouquet of flowers "to thank you, but I don't have the time.
So, here, just take this little handful of money instead." I understand the feeling, Shantay. What's the question? Well, my question is do I have to report my tips, too, when they're really sort of like thank-you gifts? Mmm, should we break the news to her, Jason? Well, if it has value, you have to report it.
Even if the money feels like a friendly gift, it's part of your income. That applies to all service occupations like these barber, hairdresser...Oh, that's me parking attendant, a bellhop, door man waiter or waitress, wait-captains, busboys, others who share restaurant tip pools delivery people, like you guys out there who bring pizza to people's homes and offices railroad redcaps, and airport skycap bartenders, hotel housekeepers, manicurists.
Did we leave anybody out, Jason? I don't think so, Jill, but if anybody out there has a job we didn't think of and tips are part of your income then you're required by law to keep a daily record of them and to report them to the IRS. Plus, any month you earn over $20 in tips, you have to report them to your employer. Anything else we forgot, Jason? Nope, except to remind people who get tip income, the more fully you report your tips, the more you can get out of it.
More social security, more that you can put into a company 401(k) Retirement plan, if your employer has one. Better unemployment benefits and better disability benefits. Plus, a better financial profile, which can make it easier to get loans at the bank. And to make it easier to keep records and give information to your employer, the Internal Revenue Service would like you to have this little record-keeping tool free -- Publication 1244.
And if you'd like to learn more about the record-keeping rules, the IRS will be happy to send you this publication, Reporting Tip Income. That's Publication 531. It's also free, another service of the IRS. To get your copies, just call toll free write it down 1-800-TAX-FORM. That's 1-800-829-3676. Our special thanks to all the thousands and thousands of people who are doing the right thing restaurant and hotel service people, parking and delivery people, casino dealers, beauticians, barbers, and others who are keeping complete records and reporting their tips fully. Keep up the good work. And thanks, from the IRS and from every American, for doing your fair share bye, bye.
This program was brought to you by the IRS. The Internal Revenue Service working to put service first.