How does U.S. government tax tips?

Question

In US, do people usually count their tips or not when declearing personal income? Does government have an effective way to track this kind of all-cash income, or people just do this by morale?

What about countries in Europe?

Thnx.

Answer 1

The IRS can easily make a close estimate of tips you are getting from a particular job based on various feedback and past records of similar employees. There are many rules you are required to follow to keep a proper record of tips you received. So if IRS decides to audit your return, they will ask for the record. If you did not keep proper record, they can charge you Frivolous return penalty.

Here is a brief information about tips.
You must include in gross income all tips you receive directly, charged tips paid to you by your employer, and your share of any tips you receive under a tip-splitting or tip-pooling arrangement.

You must do three things. 1. Keep a daily tip record. 2. Report tips to your employer. 3. Report all your tips on your income tax return.

There are two ways to keep a daily tip record. You can either: Write information about your tips in a tip diary, or Keep copies of documents that show your tips, such as restaurant bills and credit card charge slips.

You must report tips to your employer so that: Your employer can withhold federal income tax and social security and Medicare taxes or railroad retirement tax. Report to your employer only cash, check, debit, or credit card tips you receive. If your total tips for any one month from any one job are less than $20, do not report the tips for that month to that employer. If your employer does not give you any other way to report tips, you can use Form 4070. Fill in the information asked for on the form, sign and date the form, and give it to your employer. To get a 1-year supply of the form, ask the IRS or your employer for Publication 1244.

Give your report for each month to your employer by the 10th of the next month. If the 10th falls on a Saturday, Sunday, or legal holiday, give your employer the report by the next day that is not a Saturday, Sunday, or legal holiday.

Report your tips with your wages on line 1 of Form 1040EZ or line 7 of Form 1040A or Form 1040. You must report all tips you received in 2007 on your tax return, including both cash tips and noncash tips. Any tips you reported to your employer for 2006 are included in the wages shown in box 1 of your Form W-2. Add to the amount in box 1 only the tips you did not report to your employer.

Answer 2

Legally i the US tips are ordinary income, and are taxed just like wages. Does anyone cheat? I'm sure yes. Much of the reporting is on the honor system, although audits can trip people up who don't claim their tips or only claim a small portion of them.

Answer 3

In the U.S.:

Tips are taxable.
Persons are supposed to report to their employers how much they have received.
If less than a certain amount is reported, then their W-2's list "allocated tips", which are calculated at a certain percentage.