All tips received by waitresses are considered taxable income, subject to the same taxes as hourly wages. Those who earn more than $20 in tips during a calendar month are required to report these tips to their employers, who will include them as income when preparing payroll. While you are not required to report amounts less than $20 per month to your employer, these tips still are taxable and have to be reported on your tax return for the year.
Federal Taxes Withheld From Your Paycheck
Tips are added to your other earnings and a deduction is made for federal income tax based on the number of exemptions you claimed on your W-4. Medicare taxes are withheld at a fixed rate, which is 1.45 percent for 2012. There is no maximum amount for income tax or Medicare withholding's. Social Security taxes are deducted at a flat rate (4.2 percent for employees and 6.2 percent for employers for 2012) until the taxable limit is reached for the year. For 2012, this limit is $110,100. Once your total wages and tips exceed that amount, your employer should cease withholding Social Security taxes for the remainder of the year.
Paying Federal Taxes on Unreported Tips
If you have tips that you did not report to your employer, you must include them on your annual tax return. Examples of tips that are reported when filing include tips that were less than the $20 monthly minimum for reporting to your employer or tips received other than cash, such as event tickets or merchandise. These amounts are to be added to the total wages shown on your W-2 and included as gross income on Form 1040, Line 7. You also must report these tips on Form 1040, Line 57 and submit Form 4137, which is used to calculate the Medicare and Social Security taxes that are due. You will not be able to use any other 1040 form, such as the 1040EZ, if you need to include unreported tips.
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Federal Taxes on Allocated Tips
The Internal Revenue Service (IRS) has established a minimum of 8 percent of a server's sales as the reasonable amount servers receive as tips. All servers at a restaurant can be subject to tip allocation, or individual servers might have allocated tips. Allocated tips are shown on the W-2 form your employer provides you at the end of the year. If no amount is shown in Box 12, you do not have allocated tips. If you have an amount on your W-2, you must include it in your gross income on Form 1040, Line 7, unless you have kept records of your tips and can prove the allocated tips are erroneous if supporting documentation is requested by the IRS. You also must pay Social Security and Medicare on these tips. Report them on Form 4137 and include them on Form 1040 in the space provided in the "Additional Taxes" section.