Cash Tips; Should You Disclose?
By Mitchell L. Stump, CPA
Question: Should Locker Room Managers and Locker Room Attendants voluntarily report every bit of their cash tip income to their employer?
Say what??? Are you kidding me??? Tell my employer and the IRS about this cash income and then have to pay income tax on it??? Are you out of your #@% mind??? Which planet did you just arrive from??? Who do you work for anyway, the IRS?
As a CPA and consultant to the Club Industry, I have heard worse reactions to my suggestion that valets, locker room attendants and bag staff should report their cash tip income. Hopefully you will have taken a deep breath and brought your blood level down a notch to consider some ramifications of not reporting your cash tips to your employer.
Before you decide to not report 100% of your cash tip income to your employer, there are some important issues that should be pondered:
- First, there is the small fact that the law requires the reporting of cash tip income to your employer. Forms 4070A and Form 4070 should be provided by your employer to report the income. These forms can be found on my web site www.clubtax.com under the heading “Hot Club Issues”.
- Then there is the fact that the law requires the reporting of cash tip income on your individual tax return, even though you may not report such to your employer to be included on your Form W-2. Something about honesty and integrity that takes a person down the path of life is ultimately, extremely rewarding.
- Actually, reporting more income from cash tips can be financially rewarding in the long run. Reporting additional cash tip income can actually mean higher benefits paid by the Social Security Administration upon retirement, since benefits are based on lifetime reported earnings.
- This is one that really scares me personally. Should a cash tipped employee become disabled, disability payments are made based upon a percentage of compensation being reported as earned at the time of the disability. If you think becoming disabled only happens to the other guy, you may want to be sure to place all of those cash tips in a savings account, just in case.
- Should a cash tipped employee ever become displaced from their job and make a claim for Unemployment Compensation, those benefits would be higher with cash tips being reported.
- If cash tipped employees are eligible for participation in employer-sponsored plans such as pension plans or 40(k) plan’s, a higher reported income allows for a larger contribution to the plan, both employer and employee amounts.
- Finally, higher income may improve a person’s credit standing for loan approvals needed to purchase your next house or automobile.
Were there any items above that made you think about actually reporting all of your cash tips to your employer? I would venture to guess you may take just a few more seconds before you make a claim that you have never been given a cash tip. We have a voluntary tax system that encourages individuals to honestly report their income and to pay their fair share of tax dollars. Wouldn’t you like to be a part of the solution rather than being a part of the problem?
Mitchell L. Stump, CPA is President of Club Book Series, Inc., which markets and distributes Club Tax Book, as well as other Club specific publications he and others have written. Visit www.clubtax.com for more information about his products and services.
