For those working in the service industry, tips are often a vital part of their income. Like most forms of income, tips are taxable. Therefore, it’s also vital that people understand the tax obligations that come with tip income. Here’s some information to help taxpayers report tip income so they don’t receive a surprise tax bill.
Taxpayers must include all tips they receive in their gross income. This includes:
• Tips directly from customers.
• Tips added using credit, debit or gift cards.
• Tips from a tip-splitting arrangement with other employees.
The value of non-cash tips, such as tickets, passes or other items of value is also income and subject to tax.
Three things can help taxpayers to correctly report their tip income.
• Keep a daily tip record.
• Report tips to their employer.
• Report all tips on their income tax return.
Use the Interactive Tax Assistant
This online tool provides answers to tax law questions. Taxpayers can use the Interactive Tax Assistant on IRS.gov to find out if their tip income is taxable.
What employers need to know
If an employee receives $20 or more in any month, they must report their tips for that month to their employer by the 10th day of the next month. The employer must withhold federal income, Social Security and Medicare taxes on the reported tips.
Each tax season comes with unique challenges and 2022 is no exception. The IRS wants taxpayers to get the information they need as quickly as possible. Taxpayers should keep these tips in mind when they get ready to file. Following them will help get this year’s taxes done accurately and refunds issued timely.
• Avoid errors. Taxpayers should review their tax return so they can file a complete and accurate return and avoid refund delays. Filing electronically is the most accurate way to file. Taxpayers should check all names and double check all Social Security numbers, bank account and routing numbers.
• Gather records. Good recordkeeping makes preparing a tax return easier. It can also ensure taxpayers do not overlook deductions and credits.
• Start with IRS.gov. IRS.gov is available around-the-clock and it’s the fastest way to get assistance. Millions of people use IRS.gov for filing and paying taxes, getting information about their accounts or answers to tax questions. The IRS Services Guide outlines the many ways taxpayers can get help from the IRS.
• Use online tools. IRS.gov has many useful online tools. The Interactive Tax Assistant provides answers to many tax questions specific to an individual’s circumstances. It gives the same answers that an IRS representative would give over the phone.
• Report all income. Taxpayers must report their taxable income from all sources, including the gig economy, Forms W-2, Wage and Tax Statements, and Forms 1099. Other income may be taxable, even if the taxpayer does not receive a statement.
• Report unemployment benefits. Taxpayers who received unemployment benefits in 2021, must report the amount as taxable income on their tax return.
• Access online account or review IRS letters. This year, people must have the total amounts of their advance child tax credit payments and their Economic Impact Payments on hand when filing. They can check online account or review Letter 6419, 2021 Total Advance Child Tax Credit Payments, and Letter 6475, Your 2021 Economic Impact Payment, for their total payment amounts to help them file an accurate return.
• Choose a reputable preparer. Taxpayers can self-prepare or use a tax preparer. IRS.gov has resources to help people choose a tax pro. The IRS Directory of Federal Tax Return Preparers provides information on who has a professional credential or participates in the IRS Annual Filing Season Program.
• File electronically. IRS Free File online can help taxpayers claim their earned income tax credit, child and dependent care credit, child tax credit and recovery rebate credit. Some Free File options are available in Spanish. MilTax online software is available for members of the military and certain veterans, regardless of income, and is offered through the Department of Defense. Eligible taxpayers may prepare and file their federal returns and up to three state returns for free.
• Choose direct deposit. Filing electronically and choosing direct deposit is the safest and easiest way to file an accurate tax return and the fastest way to get a refund.
These frequently asked questions (FAQs) are released to the public in Fact Sheet 2022-06 PDF, January 31, 2022.
The American Rescue Plan Act (ARPA) of 2021 expanded the Child Tax Credit (CTC) for tax year 2021 only. These Child Tax Credit FAQs focus on information helpful to taxpayers preparing their tax year 2021 tax returns.
Recipients of advance Child Tax Credit payments will need to compare the amount of payments received during 2021 with the amount of the Child Tax Credit that can be claimed on their 2021 tax return.
Those that received less than the amount they are eligible for can claim a credit for the remaining amount. Those that received more than they are eligible for may need to repay some or all of the excess amount.
The IRS has sent Letter 6419 in January of 2022 to provide the total amount of advance Child Tax Credit payments that were received in 2021. The IRS urges taxpayers receiving these letters to make sure they hold onto them to assist them in preparing their 2021 federal tax returns in 2022.
These FAQs contain the following topics:
• Topic A: 2021 Child Tax Credit Basics
• Topic B: Eligibility Rules for Claiming the 2021 Child Tax Credit on a 2021 Tax Return
• Topic C: Reconciling Advance Child Tax Credit Payments and Claiming the 2021 Child Tax Credit on Your 2021 Tax Return
• Topic D: Claiming the 2021 Child Tax Credit If You Don’t Normally File a Tax Return
• Topic E: Commonly Asked Immigration-Related Questions
With the new tax season starting this week, the IRS reminds taxpayers to be aware that criminals continue to make aggressive calls posing as IRS agents in hopes of stealing taxpayer money or personal information.
Here are some telltale signs of a tax scam along with actions taxpayers can take if they receive a scam call.
The IRS will never:
• Call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card or wire transfer. Generally, the IRS will first mail a bill to any taxpayer who owes taxes.
• Threaten to immediately bring in local police or other law enforcement groups to have the taxpayer arrested for not paying.
• Demand that taxes be paid without giving taxpayers the opportunity to question or appeal the amount owed.
• Call unexpectedly about a tax refund.
Taxpayers who receive these phone calls should:
• Record the number and then hang up the phone immediately.
• Report the call to TIGTA using their IRS Impersonation Scam Reporting form or by calling 800-366-4484.
• Report the number to phishing@irs.gov and be sure to put “IRS Phone Scam” in the subject line.
A taxpayer’s filing status tells the IRS about them and their tax situation. This is just one reason taxpayers should familiarize themselves with each option and know their correct filing status. The IRS Interactive Tax Assistant can help them determine their filing status.
A taxpayer’s filing status typically depends on whether they are considered unmarried or married on Dec. 31, which determines their filing status for that entire year.
More than one filing status may apply in certain situations. If this is the case, taxpayers can usually choose the filing status that allows them to owe the least amount of tax.
When preparing and filing a tax return, filing status determines:
• If the taxpayer is required to file a federal tax return
• If they should file a return to receive a refund
• Their standard deduction amount
• If they can claim certain tax credits
• The amount of tax they owe
Here are the five filing statuses:
• Single. Normally, this status is for taxpayers who are unmarried, divorced or legally separated under a divorce or separate maintenance decree governed by state law.
• Married filing jointly. If a taxpayer is married, they can file a joint tax return with their spouse. If one spouse died in 2021, the surviving spouse can use married filing jointly as their filing status for 2021 if they otherwise qualify to use that status.
• Married filing separately. Married couples can choose to file separate tax returns. This may benefit taxpayers who want to be responsible only for their own tax or if it results in less tax than filing a joint return.
• Head of household. Unmarried taxpayers may be able to file using this status, but special rules apply. For example, the taxpayer must have paid more than half the cost of keeping up a home for themselves and a qualifying person living in the home for half the year.
• Qualifying widow or widower with dependent child. This status may apply to a taxpayer filing a 2021 tax return if their spouse died in 2019 or 2020, and they didn’t remarry before the end of 2021 and have a dependent child. Other conditions also apply.
WASHINGTON — With filing season beginning January 24, the Internal Revenue Service reminded taxpayers about several key items to keep in mind when filing their federal income tax returns this year.
Given the unprecedented circumstances around the pandemic and unique challenges for this tax season, the IRS offers a 4-point checklist that can help many people speed tax return processing and refund delivery while avoiding delays.
1. File an accurate return and use e-file and direct deposit to avoid delays. Taxpayers should electronically file and choose direct deposit as soon as they have everything they need to file an accurate return. Taxpayers have many choices, including using a trusted tax professional. For those using e-file, the software helps individuals avoid mistakes by doing the math. It guides people through each section of their tax return using a question-and-answer format.
2. For an accurate return, collect all documents before preparing a tax return; make sure stimulus payment and advance Child Tax Credit information is accurate. In addition to collecting W-2s, Form 1099s and other income-related statements, it is important people have their advance Child Tax Credit and Economic Impact Payment information on hand when filing.
Advance CTC letter 6419: In late December 2021, and continuing into January, the IRS started sending letters to people who received advance CTC payments. The letter says, “2021 Total Advance Child Tax Credit (AdvCTC) Payments” near the top and, “Letter 6419” on the bottom righthand side of the page. Here’s what people need to know:
• The letter contains important information that can help ensure the tax return is accurate.
• People who received advance CTC payments can also check the amount of the payments they received by using the CTC Update Portal available on IRS.gov.
• Eligible taxpayers who received advance Child Tax Credit payments should file a 2021 tax return to receive the second half of the credit. Eligible taxpayers who did not receive advance Child Tax Credit payments can claim the full credit by filing a tax return.
Third Economic Impact Payment letter 6475: In late January 2022, the IRS will begin issuing letters to people who received a third payment in late January 2021. The letter says, “Your Third Economic Impact Payment” near the top and, “Letter 6475” on the bottom righthand side of the page. Here’s what people need to know:
• Most eligible people already received their stimulus payments. This letter will help individuals determine if they are eligible to claim the Recovery Rebate Credit (RRC) for missing stimulus payments.
• People who are eligible for RRC must file a 2021 tax return to claim their remaining stimulus amount.
• People can also use IRS online account to view their Economic Impact Payment amounts.
Both letters – 6419 and 6475 – include important information that can help people file an accurate 2021 tax return. If a return includes errors or is incomplete, it may require further review while the IRS corrects the error, which may slow the tax refund. Using this information when preparing a tax return electronically can reduce errors and avoid delays in processing.
3. Avoid lengthy phone delays; use online resources before calling the IRS. Phone demand on IRS assistance lines remains at record highs. To avoid lengthy delays, the IRS urges people to use IRS.gov to get answers to tax questions, check a refund status or pay taxes. There’s no wait time or appointment needed — online tools and resources are available 24 hours a day.
Additionally, the IRS has several ways for taxpayers to stay up to date on important tax information:
• Follow the IRS’ official social media accounts and email subscription lists to stay current on the latest tax topics and alerts.
• Download the IRS2Go mobile app, watch IRS YouTube videos, or follow the IRS on Twitter, Facebook, LinkedIn and Instagram for the latest updates on tax changes, scam alerts, initiatives, products and services.
• Taxpayers can also get information in their preferred language. The IRS translates tax resources into several languages and currently has basic tax information in 20 languages. People can also file Schedule LEP, Request for Change in Language Preference, to receive written communications from the IRS in their preferred language.
4. Waiting on a 2020 tax return to be processed? Special tip to help with e-filing a 2021 tax return: In order to validate and successfully submit an electronically filed tax return to the IRS, taxpayers need their Adjusted Gross Income, or AGI, from their most recent tax return. For those waiting on their 2020 tax return to be processed, here’s a special tip to ensure the tax return is accepted by the IRS for processing. Make sure to enter $0 (zero dollars) for last year’s AGI on the 2021 tax return. For those who used a Non-Filer tool in 2021 to register for an advance Child Tax Credit or third Economic Impact Payment in 2021, they should enter $1 as their prior year AGI. Everyone else should enter their prior year’s AGI from last year’s return. Remember, if using the same tax preparation software as last year, this field will auto-populate.
Tax laws are complicated but the most common tax return errors are surprising simple. Many mistakes can be avoided by filing electronically. Tax software does the math, flags common errors and prompts taxpayers for missing information. It can also help taxpayers claim valuable credits and deductions.
Using a reputable tax preparer (Like SEXWORKERTAXES.com) – including certified public accountants, enrolled agents or other knowledgeable tax professionals – can also help avoid errors.
Make sure you have a system for tracking all of your expenses and income. There is a free spreadsheet you can use to categorize your expenses
• Filing too early. While taxpayers should not file late, they also should not file prematurely. People who don’t wait to file before they receive all the proper tax reporting documents risk making a mistake that may lead to a processing delay.
• Missing or inaccurate Social Security numbers. Each SSN on a tax return should appear exactly as printed on the Social Security card.
• Misspelled names. Likewise, a name listed on a tax return should match the name on that person’s Social Security card.
• Entering information inaccurately. Wages, dividends, bank interest, and other income received and that was reported on an information return should be entered carefully. This includes any information needed to calculated credits and deductions. Using tax software should help prevent math errors, but individuals should always review their tax return for accuracy.
• Incorrect filing status. Some taxpayers choose the wrong filing status. The Interactive Tax Assistant on IRS.gov can help taxpayers choose the correct status especially if more than one filing status applies. Tax software also helps prevent mistakes with filing status.
• Math mistakes. Math errors are some of the most common mistakes. They range from simple addition and subtraction to more complex calculations. Taxpayers should always double check their math. Better yet, tax prep software does it automatically.
• Figuring credits or deductions. Taxpayers can make mistakes figuring things like their earned income tax credit, child and dependent care credit, child tax credit, and recovery rebate credit. The Interactive Tax Assistant can help determine if a taxpayer is eligible for tax credits or deductions. Tax software will calculate these credits and deductions and include any required forms and schedules. Taxpayers should Double check where items appear on the final return before clicking the submit button.
• Incorrect bank account numbers. Taxpayers who are due a refund should choose direct deposit. This is the fastest way for a taxpayer to get their money. However, taxpayers need to make sure they use the correct routing and account numbers on their tax return.
• Unsigned forms. An unsigned tax return isn’t valid. In most cases, both spouses must sign a joint return. Exceptions may apply for members of the armed forces or other taxpayers who have a valid power of attorney. Taxpayers can avoid this error by filing their return electronically and digitally signing it before sending it to the IRS.
The IRS urges all taxpayers to file electronically and choose direct deposit to get their refund faster.
The home office deduction allows qualified taxpayers to deduct certain home expenses when they file taxes. To claim the home office deduction on their 2021 tax return, taxpayers generally must exclusively and regularly use part of their home or a separate structure on their property as their primary place of business.
Here are some details about this deduction to help taxpayers determine if they can claim it:
• Employees are not eligible to claim the home office deduction.
• The home office deduction, calculated on Form 8829, is available to both homeowners and renters.
• There are certain expenses taxpayers can deduct. These may include mortgage interest, insurance, utilities, repairs, maintenance, depreciation and rent.
• Taxpayers must meet specific requirements to claim home expenses as a deduction. Even then, the deductible amount of these types of expenses may be limited.
• The term “home” for purposes of this deduction:
o Includes a house, apartment, condominium, mobile home, boat or similar property.
o Also includes structures on the property. These are places like an unattached garage, studio, barn or greenhouse.
o Doesn’t include any part of the taxpayer’s property used exclusively as a hotel, motel, inn or similar business.
• Generally, there are two basic requirements for the taxpayer’s home to qualify as a deduction:
o There generally must be exclusive use of a portion of the home for conducting business on a regular basis. For example, a taxpayer who uses an extra room to run their business can take a home office deduction only for that extra room so long as it is used both regularly and exclusively in the business.
o The home must generally be the taxpayer’s principal place of business. A taxpayer can also meet this requirement if administrative or management activities are conducted at the home and there is no other location to perform these duties. Therefore, someone who conducts business outside of their home but also uses their home to conduct business may still qualify for a home office deduction.
• Expenses that relate to a separate structure not attached to the home may qualify for a home office deduction. They will qualify only if the structure is used exclusively and regularly for business.
• Taxpayers who qualify may choose one of two methods to calculate their home office expense deduction:
o The simplified option has a rate of $5 a square foot for business use of the home. The maximum size for this option is 300 square feet. The maximum deduction under this method is $1,500.
o When using the regular method, deductions for a home office are based on the percentage of the home devoted to business use. Taxpayers who use a whole room or part of a room for conducting their business need to figure out the percentage of the home used for business activities to deduct indirect expenses. Direct expenses are deducted in full.
WASHINGTON — The Internal Revenue Service today issued frequently asked questions (FAQs) for the 2021 Recovery Rebate Credit. Individuals who did not qualify for, or did not receive, the full amount of the third Economic Impact Payment may be eligible to claim the 2021 Recovery Rebate Credit based on their 2021 tax year information. Individuals may have received their third Economic Impact Payment through initial and “plus-up” payments in 2021.
Note: Third Economic Impact Payments are different than the monthly advance Child Tax Credit payments that the IRS disbursed from July through December 2021.
Most eligible people already received their Economic Impact Payments and won’t include any information about their payment when they file. However, people who are missing stimulus payments should review the information on the Recovery Rebate Credit page to determine their eligibility and whether they need to claim a Recovery Rebate Credit for tax year 2021.
To claim any remaining credit for 2021, eligible people must file a 2021 tax return, even if they usually do not file taxes. Also, people who did not receive all of their first and second Economic Impact Payments in 2020 can receive those amounts only by filing a 2020 tax return (or amending a previously filed return) and claiming the 2020 Recovery Rebate Credit. They should review the Recovery Rebate Credit page to determine their eligibility.
The 2021 Recovery Rebate Credit can reduce any taxes owed or be included in the tax refund for the 2021 tax year. Filers must ensure to not mix information from their 2020 and 2021 tax years. In particular, filers should take care to NOT include any information regarding the first and second Economic Impact Payments received in 2020, or the 2020 Recovery Rebate Credit, on their 2021 return. They will need the total of the third payment received to accurately calculate the 2021 Recovery Rebate Credit when they file their 2021 federal tax return in 2022.
People can locate this information on Letter 1444-C, which they received from the IRS during 2021 after each payment, as well as Letter 6475, which the IRS will mail to them beginning in late January 2022. Individuals can also view this information in their online account later in January.
The FAQ’s (FS-2022-04) PDF cover most questions relating to claiming the credit and are for use by taxpayers and tax professionals and are being issued as expeditiously as possible.
The 2021 Recovery Rebate FAQ topics are:
• Topic A: General Information
• Topic B: Claiming the Recovery Rebate Credit if you aren’t required to file a 2021 tax return
• Topic C: Eligibility for claiming a Recovery Rebate Credit on a 2021 tax return
• Topic D: Claiming the 2021 Recovery Rebate Credit
• Topic E: Calculating the 2021 Recovery Rebate Credit
• Topic F: Receiving the Credit on a 2021 tax return
• Topic G: Finding the third Economic Impact Payment Amounts to calculate the 2021 Recovery Rebate Credit
• Topic H: Correcting issues after the 2021 tax return is filed
With tax filing season is just around the corner, this is a good time for those who don’t normally file to consider the benefits of filing a 2021 tax return. Filing can help them claim a refundable tax credit or get an income tax refund.
Here are some things taxpayers should consider when deciding whether to file a tax return:
Find out the general reasons to file
In most cases, income, filing status and age determine if a taxpayer must file a tax return. Other rules may apply if the taxpayer is self-employed or can be claimed as a dependent of someone else. There are other reasons when a taxpayer must file. The Interactive Tax Assistant can help someone determine if they the need to file a return.
Look at tax withheld or paid
Here are a few questions for taxpayers to ask themselves:
• Did the taxpayer’s employer withhold federal income tax from their pay?
• Did the taxpayer make estimated tax payments during the tax year?
• Did they overpay last year on their taxes and have it applied to their 2021 tax?
If the answer is yes to any of these questions, they could be due a refund. They must file a 2021 tax return to get their money.
Look into whether they can claim the earned income tax credit
A working taxpayer who earned $57,414 or less last year could receive the EITC as a tax refund. For the 2021 tax year, the tax return taxpayers file in 2022, the earned income credit ranges from $1,502 to $6,728 depending on their filing status and how many children they claim on their tax return. The law allows taxpayers to use either their 2020 income or 2021 income to calculate their EITC — taxpayers may choose whichever amount gives them a larger credit. They can check eligibility by using the EITC Assistant on IRS.gov. Taxpayers need to file a tax return to claim the EITC. By law, the IRS cannot issue refunds to taxpayers claiming EITC until mid-February.
Child tax credit or credit for other dependents
Taxpayers can claim the child tax credit if they have a qualifying child under the age of 17 and meet other qualifications. Other taxpayers may be eligible for the credit for other dependents. This includes people who have:
• Dependent children who are age 17 or older at the end of 2020
• Parents or other qualifying individuals they support
The Child-Related Tax Benefits page of IRS.gov can help people determine if they qualify for these two credits.
Education credits
There are two higher education credits that reduce the amount of tax someone owes on their tax return. One is the American opportunity tax credit and the other is the lifetime learning credit. The taxpayer, their spouse or their dependent must have been a student enrolled at least half time for one academic period to qualify. The taxpayer may qualify for one of these credits even if they don’t owe any taxes. Form 8863, Education Credits is used to claim the credit when filing the tax return.
Recovery rebate credit
Individuals who didn’t qualify for a third Economic Impact Payment or got less than the full amount, may be eligible to claim the 2021 recovery rebate credit based on their 2021 tax year information. If they’re eligible, they’ll need to file a 2021 tax return even if they don’t usually file a tax return. The credit will reduce any tax owed for 2021 or be included in the tax refund.