Whether or not you are legally obligated to report tip as income has been somewhat of a fuzzy area (especially cash tips!). Skimping on reporting your full tip (100% of your tip retained) is considered deliberately underreporting income and may be subject to severe IRS audits and penalties.

If you made more than $20 in tips in any one month, you will have to report the full amount of the tip as income. Otherwise, you will be inviting an IRS audit–and will most likely be in need of a tax attorney’s representation to fight your case.

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Question: How do we as a hotel company protect ourselves if our employees don’t accurately report cash tips?? We tax them on their charged tips, but how would we do it on cash tips? Thanks.

Answer: Usually the IRS will detect unreported tips through examinations. If an employee is found guilty of underreporting tips, they will be subject to additional federal income tax, social security and Medicare taxes, and may be state in­come tax. Also, a penalty of 50% of the additional social security and Medicare taxes, and a negligence penalty of 50% of the additional income tax, plus inter­est, may apply.

All in all, it’s not worth it for an employee to underreport their income by not including 100% of their tips. As an employer, you can do your best to encourage your employees to report their full income by educating them on the benefits of tax compliance.

There are some benefits to reporting your full income (including cash and charged tips):

■ Increased income may improve fi­nancing approval when applying for larger loan amounts (mortgage, car, and other loans)
■ Increased worker’s compensation
benefits, should you get hurt on the job
■ Increased unemployment compensa­tion benefits
■ Increased social security and Medi­care benefits (the more you pay, the greater your benefits)
■ Increased employee pension, annuity, or 401(k) participation
■ Check with your employer for other increased benefits (based on pay) that your company may offer, such as life
insurance, disability payments, and the right to purchase stock options
■ Compliance with the tax law

The IRS has an excellent resource for how to handle tip income reporting. You can go to www.IRS.gov and read Publication #3148 - “Tips on Tips” A Guide to Tip Income Reporting for Employees who Receive Tips.

Tax Resolution Services is a team of tax attorneys and tax specialists that can help you!  We even offer tax advice and answer questions for free! Call 1-866-IRS-PROBLEMS for a free tax resolution consultation or visit www.taxresolution.com.

More Tax Help, IRS News and Tax Relief Tips:

1. IRS Tax Help For Small Businesses and High Income Earners Facing Increasing Tax Rates
2. Why the IRS Picks on Small Businesses and How to Avoid Triggering an Audit
3. IRS Asserts Position on Tax Protesters: Sanctions Imposed for Advancing and Maintaining a Frivolous Argument
4. Evading Taxes on Your Tax Return - The Money You Save is Not Worth the IRS Problems You End Up Causing Yourself
5. IRS Imposes Tax Penalties on Individual Who Failed to Pay Taxes on Full Income

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