Thursday, Nov. 18, 2021
Does a social media post show a legal way around income taxes on tips?
The IRS says "all cash and non-cash tips" are income and are subject to federal income taxes. States with income taxes may also tax gratuities. Declaring the tip a "gift" doesn't change that.
A social media post encourages customers to leave tips in cash or to declare tips on credit card charges to be gifts "so the government cannot tax it."
But the IRS is clear on its website that tips — cash or included on a credit card — are considered income and therefore taxable.
As for declaring tips to be gifts, the IRS is clear about that, too, defining a gift as, "Any transfer to an individual … where full consideration … is not received in return."
Because tips are in response to a product or service being provided, they cannot qualify as a gift no matter what the customer calls it.
This fact brief is responsive to conversations such as this one.
Sources
- Internal Revenue Service Tip Recordkeeping and Reporting
- Internal Revenue Service Frequently Asked Questions on Gift Taxes
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