Final answer:
To report tip income accurately, Rachel must maintain a daily record of all tips and report them to her employer if they amount to $20 or more in a month. All tips are taxable and should be included in her tax return. Accurate record-keeping and timely reporting are essential for meeting tax obligations.
Step-by-step explanation:
When Rachel, a restaurant hostess, is dealing with tip income, it's crucial for her to understand that all tips received are taxable and must be reported. The Internal Revenue Service (IRS) requires all employees who receive tips to maintain a daily record and report all tips to their employer monthly if the total tips received in a single month from any one job are $20 or more. Therefore, the correct statement to help her report her tip income accurately is that 'tips must be reported to her employer'.
To ensure compliance with tax laws, Rachel should:
- Keep a daily log of all tips received, whether in cash, checks, or credit card receipts.
- Report the total to her employer by the 10th of the month following the month in which the tips were received if they amount to $20 or more.
- Include all tips on her tax return, not just those reported to her employer.
All tips are taxable, including those received directly from customers, added to credit card charges, and shared with other employees through tip pools or splitting. The IRS provides forms such as Form 4070 (Employee's Report of Tips to Employer) to report tip income. Accurate record-keeping and timely reporting are both essential for tip earners like Rachel to meet their tax obligations.