As April 15 draws near, Americans are busy preparing their tax returns. If you receive tips as a significant part of your income, you may have questions about whether you are required to report your tips as income, how to report tips on your taxes, whether you actually earned minimum wage and, if you believe that you’re not earning minimum wage, what you can do about it.
Before going any further, I should clarify that the lawyers at Brady & Associates are not tax attorneys, and that this is not legal or tax advice. However, because many of our clients have questions about whether to report tips as income, and because we frequently represent tipped employees in claims under the federal Fair Labor Standards Act (FLSA) and state wage and hour laws, we offer this information to people who may have questions about reporting tip income on their tax return. If you have questions about your rights under the FLSA or believe you have a claim and need legal advice, contact the wage and hour lawyers at Brady & Associates for a free initial consultation. We'll answer your questions, and see if we can help you.
A frequent urban myth among tipped employees is that, because it is difficult for the IRS to track cash tips, you are not required to report them as income. This is incorrect. Employees who earn more than $20 per month in tips are required to report tips as income.
Tip income includes cash, tips added as part of a debit or credit card charge, and tips you receive from another employee.
Service charges, which are automatically added to a customer’s bill, are not tips. Examples of service charges include:
If you receive tips, you should track your tips for each day that you work. Many employers offer an electronic tip system that allows employees to log their tips at the end of every shift. If your employer does not offer an electronic tip system, you need to keep a tip diary, like the one provided on IRS Form 4070.
By properly reporting tips, your employer can accurately withhold income tax, social security, and Medicare. Reporting tips helps you by properly reflecting your income if you wish to make a major purchase like a car or house. Properly reporting tips also allows you to avoid the penalty for not reporting tips.
If you do not report tips to your employer as required, you may need to complete IRS Form 4137 to calculate the short-coming. But beware: you may be subject to a penalty of 50% of the social security and Medicare taxes you owe on the unreported tips.
If you're a tipped employee, you’re probably well-aware that your employer is not required to pay you minimum wage. Under the Fair Labor Standards Act (FLSA), an employer can take a “tip credit” if the employee’s tips bring the employee’s hourly wage up to the federal minimum wage of $7.25. Thus, your employer can pay you $2.13 per hour as long as your combined wages and tips results in an hourly wage of at least $7.25 an hour.
If, while doing your taxes, you realize that your hourly wage was less than the federal mandated $7.25, you may have a legal claim under the FLSA. In many cases, federal law allows for “liquidated damages” (two times the amount owed) for an employer who violates an employee’s right to a minimum wage. For example, if an employee earned $25.60 less than minimum wage for a week’s work and successfully sues their employer, the employer would need to pay the employee $51.20 for that week of work.
There are strict time limits on asserting your rights under the FLSA. If you have questions, or believe your employer violated your right to a minimum wage under the FLSA, contact the experienced wage and hour lawyers at Brady & Associates.