In many service-based industries, tip income is a major part of your take-home pay. Since it’s not part of a formal paycheck, though, it can be tempting to deal with it under the table, so to speak, and not report that part of your income on your taxes. However, it’s actually in your best interest to report tip income! Read on to find out why.
Building Your Credit
When you want to buy a home, a car, or open a credit card, all of those companies look at your income as part of their decision-making process. If you earn 50% of your income in tips, but only report the amount you get in your actual paycheck, then the data available about how much you make will be wildly inaccurate. From the outside, it may look like you’re not a good candidate for a mortgage, auto loan, or line of credit because, on paper, you don’t make enough to realistically pay back what you borrow.
This is one of the most important reasons why it’s vital that you fully report your income, tips included, on your taxes. Accounting for your full income in an official capacity will actually help you in the long run when it comes to participating in larger scale financial transactions.
The other major reason why it’s so important to report all of your income to the IRS has to do with benefits. You pay into benefits with your taxes so that, when you need them, they’re there for you. You may not think about needing Social Security or Medicare today, but you will in the future. If you don’t pay into those systems now, they may not be there for you in the years to come.
The same holds true for unemployment benefits. While no one plans to lose their job, it can happen. When you claim unemployment benefits, the amount of support you get is based on your last reported salary. If you only report your formal pay, then your unemployment benefits will be based on that amount, rather than taking into account your full pay including tips.
If you have any questions about reporting tip income, call the pros at Taxation Solutions, Inc. today. We are here to provide comprehensive tax guidance in St. Louis and the surrounding area. We can help you find answers to all of your tax questions!