Accelerate tax refunds, reduce IRS audit risk: report all income including from gig economy and tips

Tax pros and their taxpayer clients are happiest when they get tax refunds quickly and avoid costly and time-consuming IRS audits. The IRS provides a friendly reminder that all income must be reported, including gig economy (think 1099-K) and tip income. Remember that the agency receives copies of all W-2s, 1099s, and other income statements. Failure to include all income in a tax return will increase the likelihood of an IRS audit. 

The IRS stresses that income tax returns be complete and correct. That means including all income, including – where appropriate - income from sources other than regular wages from an employer. Income from gig economy activities and tip income are two common sources. 

Gig economy income is taxable 

The gig economy is an activity where people earn income by providing on-demand work, services, or goods, such as selling goods online, driving a car for deliveries, or renting out property. This income is often received through a digital platform like an app or website. 

Income earned from the gig economy must be reported on a tax return, even if the income is:

• From part-time, temporary, or side work. 
• Paid in any form, including cash, property, goods or digital assets. 
• Not reported on an information return form like a Form 1099-K, 1099-MISC, W-2, or other income statement. 

For more information, taxpayers should visit the gig economy tax center page of IRS.gov.  

Service industry tips are taxable above certain levels

Tips are optional cash or noncash payments customers make to employees. Generally, tips – which are usually received during work in restaurants, salons, hotels, and similar service industries – are taxable income. Here are the rules as provided by the IRS. 

Cash tips include those received directly from customers, electronically paid tips distributed to the employee by their employer, and tips received from other employees under any tip-sharing arrangement.  

All cash tips must be reported to the employer, who must include them on the employee's Form W-2, wage and tax statement. 

Noncash tips are those of value received in any medium other than cash, such as tickets, passes, or other goods or commodities a customer gives the employee. Employees don't report noncash tips to their employer, but they must report their value on a tax return. 

Any cash tips the employee didn't report to the employer must be reported separately on Form 4137, social security and medicare tax on unreported tip income, to include as additional wages with their tax return. The employee must also pay the employee share of Social Security and Medicare tax owed on those tips. 

Cash or noncash tip amounts under $20 per month, per employer, don't have to be reported. For amounts over $20, employees must report tips to the employer by the 10th of the month following the month they received the tips. 

The employee can use Form 4070, employee's report of tips to employer, available in Publication 1244, employee's daily record of tips and report to employer, or they can use an employer-provided form or other electronic system used by their employer. 

The agency provides more information on reporting tip income on the tip recordkeeping and reporting page of IRS.gov.