Miranda works as a waiter at a local pub and is adjusting to the new OBBBA reporting requirements for tipped income. Throughout the year, Miranda reports $20,000 in tips to her employer on Form 4070. The Form W-2 issued by her employer shows $200,000 in Box 1 (wages, tips, other compensation)—an amount that exceeds the Social Security wage base—and reports $15,000 in Box 7 (allocated tips). Miranda finds $4,000 in unreported tips, reports it on Form 4137, line 4, and includes it as part of her income on Form 1040.
When determining the amount of qualified tips eligible for certain tax benefits, such as potential credits or exclusions, Miranda has options. She may use either the $15,000 reported in Box 7 of the W-2 or the higher $20,000 in tips reported to her employer on Form 4070. Additionally, the $4,000 in unreported tips can be included in the qualified tips total. This approach ensures tipped employees receive fair consideration for all reported and self-disclosed tips when determining applicable benefits.
Consult your tax professional about your specific circumstances.
Client Profile is based on a hypothetical situation. The solutions discussed may or may not be appropriate for you.