Jack Grooms, Licensed Taxpayer Representative
Recently I was discussing the topic of tipped employees with the Marketing and Communications staff and I found that there are some misconceptions floating around about tips. The most surprising one was that many bartenders believe they do not have to claim any cash tips that they receive; only those that are charged to a credit card. Some businesses are actually telling their employees this, but it is false! The IRS considers those tips to be part of your income and that means you must report them to the IRS.
Believe me, it is better to report your tips than to be audited. I know of a case where a server who was audited and had no proof of her tipped income. An audit agent of the IRS came to the restaurant where she worked and observed her. He then averaged the daily tips she made to complete her audit. He was then able to use these averages to determine what she owed in back penalties and taxes.
Don’t let this happen to you! Keep a daily record of the tips you make – whether it’s a diary, photocopied receipts, or IRS Form 4070A. Any of these will act as proof of your tip income and assist you successfully through an audit.