Tax Tip 2023-42: All income is taxable, including gig economy and tip income

IRS Tax Tips

March 30, 2023

Issue Number: Tax Tip 2023-42

All income is taxable, including gig economy and tip income

It?s important for taxpayers to file a federal tax return that has a complete and correct reporting of their income ? which may mean including income from sources other than regular wages from an employer. Income from gig economy activities and tip income are two common sources of such income.

Gig economy earnings are taxable
The gig economy is activity where people earn income 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.

Taxpayers must report income earned from the gig economy 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.

Reporting service industry tips
People who work in restaurants, salons, hotels and similar service industries often receive tips for the customer service they provide. Tips are generally taxable income, and it's important for people working in these areas who regularly receive tips to understand the requirements on reporting tips.

Tips are optional cash or noncash payments customers make to employees.

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 the value of them 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.

Employees don't have to report tip amounts of less than $20 per month per employer. For larger amounts, 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.

For more information on how to report tips taxpayers should review the Tip Recordkeeping and Reporting page of IRS.gov.

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Issue Number: Tax Tip 2023-42