If you’re an employee who earns tips, it’s important to keep track of all the tips you received. The IRS considers all tips you receive to be taxable income. When calculating your tips for the day, don’t include gratuities automatically charged for large parties.
Go to this section in Credit Karma Tax: Social Security and Medicare Tax on Unreported Tip Income
When would I have unreported tips?
Generally, if you receive more than $20 a month in cash tips, you must report them to your employer. The key word here is “cash” which includes tips a customer leaves on a credit/debit card charge. Unreported tip income occurs when you don’t report the cash tips you made to your employer.
Keep in mind that unreported tips are still subject to Social Security and Medicare taxes, so you must report this income on your tax return. When you enter your unreported tips into Credit Karma Tax we’ll help you calculate the Social Security and Medicare tax based on the information you provide.
If you fail to report tips to your employer that you are required to report, you may have to pay a penalty of 50% of the Social Security, Medicare, or other taxes owed on those unreported tips. Tips that were below $20 in a month that do not need to be reported to your employer will not be penalized but must still be reported on your tax return.
The IRS provides additional resources for Tip Recordkeeping & Reporting if you need more information.