In many service-based occupations, receiving tips is a normal part of your workday. It can be tempting to keep that stream of income “under the table” so it doesn’t count as part of your taxable income. Not only is that illegal; it can also hurt your financial stability in the long run.
The main thing to remember is that tips are earned income and you must report those earnings to your employer and on your tax return. That’s the law, and failing to do so can land you in hot water down the line if the IRS takes a closer look at your taxes!
On top of those legal considerations, though, it can actually be better for your overall financial health to report tip income. By doing so, you keep an accurate record of your earnings, and your full income is on the books. This can help you immensely when it comes time to buy a car, apply for a mortgage, or seek other loans. Most of those determinations take into account your income in order to assess if you’re a suitable loan applicant. If your reported income is too low, you could be denied loans for which you actually should qualify.
When you report your tip income, you also increases your social security and Medicare benefits down the line, and you help keep those systems strong for when you do need them. While you may not be concerned about those benefits today, your future self will thank you for paying into them!
The same applies for unemployment benefits. If you lose your job, your unemployment benefits will be determined by how much you were making beforehand. If you only report the wage portion of your income, but not the tip portion, your unemployment benefit will be significantly lower than what you actually made.
To learn more about the benefits of reporting tip income, or to find out how to report those earnings, call the experts at Taxation Solutions, Inc. today! We’re your go-to resource in Raleigh for tax information, and we’re here to help you get all the info you need to accurately report your tip income.