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Ta k e 5 a n d t r y A B M P F i v e - M i n u t e M u s c l e s a t w w w. a b m p . c o m / f i v e - m i n u t e - m u s c l e s . 71 WHAT IS A TIP? The IRS defines "tips" as payments clients make solely of their own volition. In other words, the client chooses to pay you more money than they owe you for services rendered. Tips can include: • Cash tips received directly from customers • Tips from customers received through electronic payment (credit, debit, or gift cards—or any other electronic payment method) • The value of any noncash tips (such as event tickets or other items of value) • Tip amounts received from other employees (paid out through tip pools, tip splitting, or other formal or informal tip-sharing arrangements) Mandatory tips (added to bills) are not considered tips by the IRS, but instead are viewed as service charges (sometimes called auto-gratuities). These service charges, which are added to a bill or fixed by an employer, are considered non-tip wages and are subject to social security tax, Medicare tax, and federal income tax withholding. Employers cannot use non-tip wages when computing tax credits available to them under section 45B of the Internal Revenue Code because these amounts are not tips. REPORTING GUIDELINES Generally, any income received in the form of tipping is considered taxable income. Use the following guidelines to correctly report any tip income you or your employees receive. Employees If you're an employee, you must keep accurate, daily records of cash tips, including sufficient proof of your tip income for the year. A daily record of your tip income is considered sufficient proof. No particular form must be used, but your tip statement must be signed by yourself and must include: • Your name, address, and social security number • Your employer's name and address (and establishment name, if different) • Month or period your report covers • Total amount of tips you received during the month or period You may also use Form 4070, Employee's Report of Tips to Employer, which is available in IRS Publication 1244, Employee's Daily Record of Tips and Report to Employer. Additionally, you may use any other form If you accept tips for your services, there are basic guidelines to keep in mind, whether you are an employee, sole proprietor, or business owner. As an employee, if you receive tips that total $20 or more for any month while working for one employer, you must report your tips to that employer. You must then continue reporting tips totaling $20 or more every month regardless of your total wages and tips for the year. As a sole proprietor, you must report your monthly tips over $20 to the Internal Revenue Service (IRS) as well. If you are an employer, you have multiple obligations when it comes to tip income, including recordkeeping and reporting, collecting taxes on employee tips, filing tax forms, and paying or depositing taxes. Following are tips on tips to keep you in compliance with IRS income guidelines.

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