Why you should report tip income on your taxes - a podcast by Mac Tax

Although this is not the tax tip you will be happy to hear about, future you will thank yourself (and me) when you avoid any type of audit and penalties from the IRS. The rule is cash tips are required to be reported on your income tax return and have payroll taxes withheld from tip income earned at your job. It is the employees responsibility to document tips earned each month. The employee must then report the amount of tips earned in that month to the employer by the 10th day of the following month. The employer then has a responsibility to withhold payroll and income taxes from the employee on the amount of tips earned. 

Understating income can lead to opening yourself up to an audit and paying 20% penalties on any underpaid taxes. If you work in an industry that tips are standard it may be a red flag to the IRS when your W-2 statement at year end has $0 for "Allocated Tips".

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