7

My wife does seasonal gardening work. Her employer pays her hourly, withholds taxes, provides W-2s, etc. She does her work on a single property, and last year the owners of the property gave her an extra (off-the-books) cash payment at the end of the season. I'm not sure whether to call it a bonus or tip, or what the implications of that might be. How do I report this on our income tax return?

Further details:

  • The property owners have a business relation with her employer, but the payment was from them as private citizens, not from her employer.
  • We're married filing jointly, and around median household income if that makes any difference.

Edit: I guess this is primarily a question of classification... what exactly is this money considered? A tip? A bonus? A gift?

10

How do I report this on our income tax return?

You should include it on Line 7 of your Form 1040.

Additionally, you should report the extra payment to your employer if it was greater that $20. You can use From 4070 to do this if your employer does not provide you with a form. And finally, you are right, you should Form 4137 to report any tips that you include on your Form 1040 in order to pay the required social security and medicare taxes.

Credit is due to glibdud and Nathan L for constructive feedback! Thanks!

  • Thanks, looks like the relevant excerpt is "If your employer pays you with cash or in some way outside of their normal payroll system (e.g. hefty gift card), this isn’t an invitation to become a tax evader. You should simply report this bonus as income on Line 7 of your Form 1040. With that in mind, make sure you set aside some of the bonus for taxes." – glibdud Jan 24 '17 at 14:20
  • 1
    There's still a question of whether this is considered a bonus or a tip. If it's a tip, it looks like we'll also have to submit form 4137... is there any corresponding form for unreported bonuses? Or is that a false distinction? – glibdud Jan 24 '17 at 14:35
  • The IRS says this about miscellaneous compensation, "If you receive a bonus or award (cash, goods, services) from your employer, you must include its value in your income. However, if your employer merely promises to pay you a bonus or award at some future time, it isn’t taxable until you receive it or it’s made available to you." The IRS doesn't say anything about any extra forms you need to submit for your wife's bonus. – Nosrac Jan 24 '17 at 15:14
  • @DanielCarson, this isn't a bonus because it isn't coming from the employer, it's almost certainly a tip because it is coming from one of the employer's clients. – Nathan L Jan 24 '17 at 15:41
  • 2
    This has come up many times. The IRS treats it like a tip because she was performing a service for those property owners, and she doesn't have a personal relationship outside of the business relationship. The money was certainly meant to compensate above and beyond for services rendered. If she knew them personally, and they said--we know you have a trip to Europe coming up, so we wanted to give you some spending cash--or, hey, Happy Birthday!--those could be considered gifts, but absent a relationship outside of working together that allows for such knowledge... Not a gift. – Nathan L Jan 24 '17 at 15:49
9

Daniel covered the correct way to file on the returns, I'm chiming in specifically to discuss the question of whether it could be a gift.

The IRS will classify it as a tip even if the person giving it says it's a gift if a service was rendered before the gift was given. The only way that you could make a case to the IRS that it was a gift is if you have a personal relationship outside of the working environment, and the person giving the gift provides an explanation for the motivation behind the gift.

Such explanations as "Happy Birthday" or "Congratulations on graduating" or other special occasions could be gifts. But "you did a good job, and I just want to reward you for your effort" is not a reason someone gives a gift, and the IRS will penalize you if you do not have evidence that it was a gift rather than a tip.

  • Sounds like you should let them know when your birthday is. – Aaron McMillin Jan 24 '17 at 18:31
  • @AaronMcMillin That might be considered a little tacky if you don't already have a relationship outside the professional relationship. – Nathan L Jan 24 '17 at 18:39
  • You'd have to find the right way to frame it. As a client giving an annual gratuity I'd put it in a hallmark card if it saved you 30-ish% in taxes. – Aaron McMillin Jan 24 '17 at 19:41
0

Employers are not supposed to give cash gifts to their employees, even if you try to call it a "gift" for tax purposes. Presumably, the reason your wife's employer gave her cash was to be nice and save her taxes on that amount. Her employer already paid tax on that money so that your wife doesn't have to. If she plans to declare it anyway, then she should instead give it back and ask for it to be added to the W2 as an end of year bonus. This way her employer could then deduct the payment and pay her a larger amount of money. (The additional amount would be approximately their tax rate minus about 7.45% for FICA.) In fact, if your wife's tax rate is more than 15% lower than her employer's, then this is actually mathematically best for both parties.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.