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Are tips taxable income?

The range of different things the federal government classifies as taxable income is quite large. It is important for taxpayers to be aware of what is considered taxable income and what rules the federal government has for the various income streams they have.

Today, we will focus on an income stream individuals in service industries might be quite familiar with, tips. Tips do fall under the category of taxable income. There are also certain requirements the federal government puts on employees and employers when it comes to tips.

For one, employees who receive tips are subject to reporting requirements. Tipped employees are to make monthly reports to their employer of the tips they received (as a note, such a report is not necessary for months in which an employee's tip total was under $20).

Employers of tipped employees in turn are to include reported tips in their calculations for how much to withhold for payroll taxes. In some instances, employers are required to submit special tax forms in relation to employee tips.

When it comes to tips, it is important for both employers and employees to follow all applicable tax rules. Failure to properly report tip income, failure to make a proper withholding regarding tip income or other violations of tip-related rules, even if inadvertent, could put an employee or employer in hot water with the Internal Revenue Service. When a person (whether an employer or employee) is in a dispute with the IRS over tax matters regarding tips, they should promptly seek out legal guidance from a qualified tax lawyer, given the major consequences that can come out of such disputes.

Source: Internal Revenue Service, "Reporting Tip Income - Restaurant Tax Tips," Accessed Jan. 22, 2016

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