Tax Tips: Are my tips taxable?

If you work at a restaurant or any establishment where you receive tips, you need to be sure to report those tips on your income tax return. This includes any business or job at which tips are received – a casino, drycleaner, hair stylist, manicurist, bell hop, valet, golf caddy, and the like.

The tips you must report include both credit card tips and cash tips. It's tempting to not report the money, especially if the tips are in cash. But beware that the IRS has ways of going after employees for not reporting cash tips. Most notably, they like to look at the documentation related to tips on credit cards, and use that to figure out what you probably received in cash tips.

Your best bet is to keep daily records of the cash tips you receive in case you're ever audited. Just ask any restaurant employee who's been audited for cash tips: It's not pleasant and the IRS will make you prove any numbers that conflict with the amount they think you should have reported. More information on reporting your tips can be found in IRS Publication 531.

Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Accounting, and is the author of Essentials of Corporate Fraud.