Question

Maggie completed her Form W-4 based on her wages as a waitress. However, she has more tip income than she expected. What could she do to make sure her withholding is adequate?

A) She doesn't need to be concerned because tip income is exempt from withholding.

B) She could use the IRS Withholding Calculator and then submit a new Form W-4 to her employer.

C) As long as her Form W-4 indicates she is single, she will be fine.

D) She is required to make estimated payments on her tip income.

Answer 1

Answer : Option B : She could use the IRS Withholding Calculator and then submit a new Form W-4 to her employer

Explanation :

To the IRS, tips are taxable income just like wages. If you earn tips, you're responsible for paying income, Social Security and Medicare tax on the tip money you receive. The IRS requires your employer to withhold enough money from your wages; however, the amount withheld is based on the total of your wages plus the tip income you report, even if you receive the tips directly from the customer in cash.

The IRS requires you to report your total monthly tips to your employer , If you fail to report your tips to your employer, the IRS can impose a penalty equal to 50 percent of the Social Security and Medicare tax you fail to pay.