Monthly Archives: September 2015

Tips Earned Can Be Taxing

Tips are income too. Do you get tipped? Do you work in an occupation where tips are part of your total compensation? If so, you need to be aware of several facts relating to your federal income taxes.

Tips, tip splitting, tip reporting

Tips are Taxable

Tip income is subject to federal, social security, and Medicare taxes. The value of non-cash tip income, such as tickets, passes, or other items of value, is also income and subject to taxation.

Include Tips on Your Tax Return

You must include in gross income all the cash you received directly from customers. This includes tips added to credit cards, and your share of any tip received under a tip-splitting arrangement with fellow employees. This is regardless if your employer records the tips or not. Reporting is the responsibility of the person who ultimately receives them.

Report Tips to Your Employer

If you receive $20 or more in tip income in that month, you should report all of your tips to your employer. Your employer is required to withhold federal income, social security, and Medicare taxes. If the tips received are less than $20 in any month, they need not be reported to the employer. However, these tips are still taxable and must be reported on your tax return, as they are subject to income and social security taxes.

Tip-Splitting and Cover Charges

Under a tip-splitting arrangement are not subject to the reporting requirement. You should report to your employer only the net tip income you receive. Service or cover charges, which are randomly added by the business establishment, are excluded from the tip reporting requirements. The employer should add each employee’s share of service charges to each employee’s wages.

Employer Allocation of Tips

Tip allocation is applicable to “large food and beverage establishments.” These are food service businesses where tipping is customary and that have 10 or more employees. These establishments must allocate a portion of their gross receipts as tip income to those employees who “underreport.” Under reporting occurs if an employee reports tips that are less than 8% of the employee’s applicable share of the employer’s gross sales. The employer must allocate to those underreported employees the difference between what the employee reported and the 8%. If you are in this situation, your allocation amount will be noted on your W-2 form. These allocated tips will not have been included in the total wages box on your W-2, so they must be accounted for as additional wage income on your return, unless you have adequate records to show that the amount is incorrect. Because social security, Medicare, and Additional Medicare taxes were not withheld from the allocated tip income, to the extent these tips are included in your income, you must report those taxes as additional tax on your return. The IRS frequently issues inquiries when the taxpayer’s W-2 shows an allocation of tips and a lesser amount is reported on the tax return.

Keep a Running Daily Log of Tip Income

Tips are a frequently audited item and it is a good practice to keep a daily log of your tips. The IRS provides a log in Publication 1244 that includes an Employee’s Daily Record of Tips and a Report to Employer for recording your tip income. Here is an IRS Publication 1244 that can help you with the daily recording of tips.

Maybe you are a restaurant or service employer or employee who receives tips, read more about the IRS handling of tips here. If you are receiving tips and have any questions about their taxation, please feel free to call Alex Franch, BS EA at 781-849-7200.

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Charitable Contribution: Tax Plan for Potential IRA-to-Charity Provision

2015_09_03 Charity, donation3Are you are 70.5 or over? Have you not taken all or any of your 2015 required minimum distribution (RMD) from your IRA? Do you plan to but have not yet made a significant charitable contribution? Here is a tip that could save some tax dollars.

In previous years, there has been a tax provision allowing an individual age 70.5 or older to make a direct transfer of money. This transfer could be up to $100,000, from his or her IRA account to a qualified charity. That provision expired on December 31, 2014. However, Congress has extended that provision in the past. There is a good chance it may be extended again. In fact, the Senate Finance Committee working group on individual tax reform, just recently, recommended extending the provision.

What if Congress Does Not Extend the Charitable Tax Plan Contribution?

If Congress does not extend it, you will have still satisfied your minimum distribution requirement. The amount transferred to the charity will still count as a charitable contribution. If Congress does extend it, you can take advantage of the tax benefits described later in this article.

If you wait to see whether the provision will be extended, and Congress waits until the last minute, you may not have time to take action. This was the case for most taxpayers last year. You may have already taken your RMD or made that charitable contribution.

What happens if the provision is extended?

If the provision is extended, here is how it will play out on a tax return:

  1. The distribution is excluded from income;
  2. The distribution counts towards the taxpayer’s Required Minimum Distribution for the year; and
  3. The distribution does NOT count as a charitable contribution.

At first glance, this may not appear to provide tax benefits. However, by excluding the distribution, a taxpayer lowers his or her income (AGI) for other tax breaks pegged at AGI levels such as medical expenses, passive losses, taxable Social Security, etc. Those who do not itemize essentially receive the benefit of a charitable contribution to offset the IRA distribution.

Would you like more information how to maximize your tax benefit based on a charitable contribution?

If you think that this tax provision may affect you. Would you would like to explore the possibilities with some tax planning? Alex Franch, BS EA at 781-849-7200.

You can read more about the potential IRA-to-Charitable Tax plan contribution from 2014 here.

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Perhaps you know someone who may benefit from this information, please feel free to share:
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