Tips you earn as a waitress are a type of compensation and are subject to the same federal taxes as wages or salary. Because tip income might not appear on your W-2, and because your employer might not have withheld taxes on your tips, reporting the income on your tax return can be complex.
If you receive more than $20 in a month as tips, you’re required to report the total to your employer. Your employer provides you with a format to report your tips in writing. Include whatever you received, including tips paid in cash directly from customers, tips that customers add to charged meals, and tips paid from sharing arrangements with co-workers. The tips you report are added to your total income, on which your employer withholds income tax plus taxes for Social Security and Medicare. The tips, other income and withheld taxes appear on your Form W-2.
Your employer adds allocated tips to your taxable income when the amount of reported tips from the entire staff is less than 8 percent of gross receipts. This amount is not paid to you by your employer but is included in your reported taxable income and appears on your W-2 form. You must pay taxes on this amount as well. Your share of allocated tips is typically determined by your proportionate share of gross receipts or hours worked. Your employer does not withhold any type of taxes on allocated tips.
You can give money to your employer that covers your taxes the business remits on your reported tip income. Many waitresses earn more from tips than from their regular hourly wage. Giving your employer some of your tip income for taxes eliminates the possibility of paychecks that are too small to cover tax withholding on wages and reported tips combined.
Like all workers, you owe taxes on both wages and tips. Some of your tax liability is paid through withholding by your employer. You must report on your tax return all wages and tips on your Form W-2, including allocated tips. Include on your tax return any tips of less than $20 per month that you were not required to report to your employer. You must also calculate on your tax return the taxes for Social Security and Medicare that were not withheld for allocated tips.
Brian Huber has been a writer since 1981, primarily composing literature for businesses that convey information to customers, shareholders and lenders. Huber has written about various financial, accounting and tax matters and his published articles have appeared on various websites. He has a Bachelor of Arts in economics from the University of Texas at Austin.