In the third of our series looking into tips, pay, and taxes, we examine how tips are taxed and why you should stay on the right side of the IRS.
Are tips taxed? How do you report tips? Should you? The answers are ‘yes’, ‘how you might expect’, and ‘definitely, if you like having money to hand’. But maybe you need more information? In this blog post, we dive into the ins-and-outs of tip declaration; how tips are taxed and why you absolutely will be glad that you declared them (or that your employees did)!
There are lots of questions about how the IRS handles tips. Whether you’re a housekeeper, a guest, or an employer, tipping in hotels is a big deal. Guests want to know the facts about tipping hotel housekeepers. Housekeepers want to know their obligations, and employers need to know these too. In this blog, we get to the facts of tipping in hotels and taxes.
Are you a housekeeper in a hotel? No doubt you love it when a tip shows up, as you should. You work hard and deserve to be appreciated. It’s easy to forget to record tips as they come in and treat them as just a little disposable cash.
The first thing to know is that you must record the tips you get on a daily basis. If you employ housekeepers as a hotel employer you should double check this is being done accurately, and how the tips are being recorded.
Okay, but why bother (other than the fact that you’re legally obligated to)? Did you know that the IRS audits service staff more than the ordinary taxpayer? They know that a lot of tips go undeclared. When they see service staff – like housekeepers or waiting staff – declaring incomes with no or suspiciously low tips they know something’s up. Don’t take the risk – don’t get in trouble.
If you receive tips and they regularly reach $20 per month or more, you need to start reporting the numbers to your employer. Since tips above this level are of interest to the IRS, it’s important you get this right. If you’re a housekeeper, keep track of your tips as you go instead of trying to remember it all later. It will save you a tremendous amount of work and frustration.
But besides avoiding trouble with the IRS, there are plenty of reasons why you should declare your tips on your tax forms. Declaring your tips as a housekeeper or other service worker can help your financial planning dramatically. Just being aware of the money that’s coming in and going out can be a huge step forward. But what if you saved your tips? That could be a major asset for you. Housekeepers who keep their tips and casual cash separate may have better financial health.
What’s more, having a higher ‘official’ income can help with your credit score and give you access to options you may not have realized you have. Banks and loan companies look at your income when deciding whether to grant you a mortgage, for example. And they can only use the income that they see. Money that’s under the table stays off the banks’ radar. Money you aren’t hiding can be an asset.
If you’re an employer, like a hotel general manager, you may want to hold workshops or otherwise advise on tip tracking to help staff wellbeing, boost efficiency, and keep operations ticking over smoothly. A standardized system as part of formal training can help with this from the offset.
What does this mean for people who get tips in practical terms? Tips must be reported on the employees W-2 form. The employee must also include tips on their personal tax return. Tips must also be reported for Social Security and Medicare tax calculation on IRS Form 4137.
It’s the employee’s obligation to report tips to you and the IRS for taxes. As the employer, you’re not liable to pay your share of FICA (Federal Insurance Contributions) taxes until the IRS gives you notice that they’re expecting payment from you.
We hope you’ve found this information useful. Please remember that this information is provided as an overview only and in no way constitutes formal financial advice. If you feel you require any further information about your responsibilities, consult the IRS website directly or a qualified accounting professional.