How do I report this cash bonus/tip on income tax return?
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! "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." "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."
I assume the OP is the US and that he is, like most people, a cash-basis tax payer and not an accrual basis tax payer. Suppose the value of the rental of the unit the OP is occupying  was reported  as income on the OP's 2010 and 2011 W-2 forms but the corresponding income  tax was not withheld.  If the OP correctly transcribed these income numbers onto his tax returns, correctly computed the tax on the income reported on his 2010 and 2011 1040 forms, and paid the amount due in timely fashion,  then there is no tax or penalty due for 2010 and 2011. Nor is the company entitled to withhold tax on this income for 2010 and 2011 at this time; the tax on that income has already been paid by the OP directly to the IRS and the company has nothing to do with the matter anymore. Suppose the value of the rental of the unit the OP is occupying  was NOT reported as income on the OP's 2010 and 2011 W-2 forms.  If the OP correctly transcribed these income numbers onto his tax returns, correctly computed the tax on the income reported on his 2010 and 2011 1040 forms, and paid the amount due in timely fashion,  then there is no tax or penalty due for 2010 and 2011. Should the OP have declared the value of the rental of the unit as additional income from his employer that was not reported on the W-2 form, and paid taxes  on that money? Possibly, but it would be reasonable to argue that the OP did nothing wrong other than not checking his W-2 form carefully: he simply assumed the income numbers included the value of the rental and copied whatever the company-issued W-2 form said onto his 1040 form. At least as  of now, there is no reason for the IRS to question his 2010 and 2011 returns because the numbers reported to the IRS on Copy A of the W-2 forms match the numbers reported by the OP on his tax returns.    My guess is that the company discovered that it had not actually declared the value of the rental payments on the OP's W-2 forms for 2010 and 2011 and now wants to include this amount as income on subsequent W-2 forms. Now, reporting a lump-sum benefit of $38K (but no actual cash)  would have caused a huge amount of income tax to need to be withheld, and the OP's next couple of paychecks might well have had zero take-home pay as all the money was going towards this tax withholding. Instead, the company is saying that it will report the $38K as income in 78 equal installments (weekly paychecks over 18 months?)  and withhold $150 as the tax due on each installment. If it does not already do so, it will likely also include the value of the current rent as a benefit and withhold tax on that too. So the OP's take-home pay will reduce by $150 (at least) and maybe more if the current rental payments also start appearing on the paychecks and tax is withheld from them too. I will not express an opinion on the legality of the company withholding an additional $150 as tax from the OP's paycheck, but will suggest that the solution proposed by the company (have the money appear as taxable benefits over a 78-week period, have tax withheld, and declare the income on your  2012, 2013 and 2014 returns) is far more beneficial to the OP than the company declaring to the IRS that it made a  mistake on the 2010 and 2011 W-2's issued to the OP, and that the actual income paid was higher. Not only will the OP have to file amended returns for 2010 and 2011 but the company will need to amend its tax returns too. In summary, the OP needs to know that He will have to pay taxes on the value of the waived rental payments   for 2010 and 2011. The company's mistake in not declaring this as income to the OP   for 2010 and 2011 does not absolve him of the responsibility   for paying the taxes What the company is proposing is a very reasonable solution to the   problem of recovering from the mistake. The alternative, as @mhoran_psprep points out, is to amend   your 2010 and 2011 federal and state tax returns to declare the   value of the rental during those years as additional income,   and pay taxes (and possibly penalties) on the additional   amount due. This takes the company completely out of the picture,   but does require a lot more work and a lot more cash now rather   than in the future. "If this is truly hobby income (you do not intend to operate as a business and don't have a profit motive) then report the income on Line 21 (""other income"") of form 1040.  If this is a business, then the income and expenses belong on a Schedule C to form 1040. The distinction is in the treatment of profits and losses - your net profits on a business are subject to self-employment tax, while hobby income is not. Net losses on a business are deductible against other income; net losses on a hobby are miscellaneous itemized deductions in the ""2%"" box on Schedule A.  From a tax point of view, selling apps and accepting donations are different. Arguably, donations are gifts; gifts are not taxable income.  The hobby/business and income/gift distinctions are tricky. If the dollar amounts are small, nobody (including the IRS) really cares. If you start making or losing a lot of money, you'll want to get a good tax person lined up who can help you decide how to characterize these items of income and expens, how to put them on your return, and how to defend the return on audit if necessary." Does it make sense to report withheld tax income as an additional   income? Is it required by the IRS? Is $T deductible? This is what is called imputed income. The ticket is an income for you, but the company doesn't want you to pay tax on it. But you have to. But they want to be nice to you and give you the ticket on their buck. But that's the law. So what have the accountants invented? Imputed income. The company raises your salary in the amount of taxes paid (+some, but that's negligible), in addition to the actual ticket. So it seems, to you, that you got the ticket for free. The IRS doesn't see the ticket, it just sees that you got a $T+$X bonus and paid $T taxes. The fact that the $X you got in form of a ticket doesn't matter to them. Re your edit - you cannot deduct anything, since you can only deduct unreimbursed expenses, whereas $X is not at all an expense for you (you didn't buy that ticket, the company did), and $T is taxes, which are not deductible (its not an expense). In other words, had C not have been nice, I would be in a better   position! No. Your net pay shouldn't be affected, technically, so from your perspective you just got a plane ticket for free. Had C not been nice, you would still not be able to deduct the whole cost of $X, because unreimbursed employee expenses have a 2% AGI threshold. "Keep in mind that all of the information below assumes: That being said, here are some examples of national tax laws relating to barter transactions. Obviously this isn't an exhaustive list, but based on my grossly non-representative sample, I think it's fairly safe to assume that barter transactions are more likely taxable than not.  You're referring to a barter system; in the United States, the IRS is very specific about this (see the section titled Bartering).  Bartering is an exchange of property or services. The fair market   value of goods and services exchanged is fully taxable and must be   included on Form 1040 in the income of both parties. The IRS also provides more details: Bartering occurs when you exchange goods or services without   exchanging money. An example of bartering is a plumber doing repair   work for a dentist in exchange for dental services. You must include   in gross income in the year of receipt the fair market value of goods   and services received in exchange for goods or services you provide or   may provide under the bartering arrangement. Generally, you report this income on Form 1040, Schedule C (PDF),   Profit or Loss from Business or Form 1040, Schedule C-EZ (PDF), Net   Profit from Business. If you failed to report this income, correct   your return by filing a Form 1040X (PDF). Refer to Topic 308 for   amended return information. So yes, the net value of bartered goods or services is most likely taxable. According to the Australian Tax Office: Barter transactions are assessable and deductible for income tax   purposes to the same extent as other cash or credit transactions. Her Majesty's Revenue and Customs states that: If you supply services or goods (new or second-hand) and receive other   goods or services in payment, there are two separate supplies: You must account for VAT, and so must your customer if they're   VAT-registered. The VAT treatment is the same as for part-exchanges.   You must both account for VAT on the amounts you would each have paid   for the goods or services if there had been no barter and they had   been paid for with money. Searching the website of the Federal Tax Service for the Russian/Cryllic word for barter (бартер) doesn't yield any results, but that might be because even between Google Translate and the rest of the internet, I don't speak Russian. That being said, I did manage to find this (translated from the first full paragraph of the Russian, beginning with ""Налог на доходы..."": The tax on personal income is paid by citizens of the Russian   Federation with all types of income received by them in the calendar   year, either in cash or in kind. Since bartering would probably qualify as an in kind transaction, it would likely be taxable.  The South African Revenue Service includes barter transactions in the supply of goods taxed under the VAT.  The term “supply” is defined very broadly and includes all forms of   supply and any derivative of the term, irrespective of where the   supply is effected. The term includes performance in terms of a sale,   rental agreement, instalment credit agreement or barter transaction. Look for section 3.6, Supply and Taxable Supply, found on p17 of the current version of the linked document." If you don't receive a W2, there are 2 scenarios you should consider: If you have reason to believe that scenario 1 is accurate, then you could file your taxes based on the last valid paycheck you received. If you have reason to believe that scenario 2 is accurate, then you need to do some extra math, but fortunately it is straight forward. Simply treat your final paychecks as if the gross amount of your check was equal to the sum of your taxes paid, and the net amount of the check is $0. This way your income will increase by the proper amount, and you will still receive credit for the taxes paid. This should work out cleanly for federal and state taxes, but will likely result in an overpayment of FICA taxes. You can use form 843 to receive a refund of excess FICA taxes. As a side note, I'd recommend spot checking the YTD numbers on your last paychecks against previous paystubs to make sure there wasn't any fuzzy math going on when they realized they were going out of business. "(Insert the usual disclaimer that I'm not any sort of tax professional; I'm just a random guy on the Internet who occasionally looks through IRS instructions for fun. Then again, what you're doing here is asking random people on the Internet for help, so here goes.) The gigantic book of ""How to File Your Income Taxes"" from the IRS is called Publication 17. That's generally where I start to figure out where to report what. The section on Royalties has this to say: Royalties from copyrights, patents, and oil, gas, and mineral properties are taxable as ordinary income. In most cases, you report royalties in Part I of Schedule E (Form 1040). However, if you hold an operating oil, gas, or mineral interest or are in business as a self-employed writer, inventor, artist, etc., report your income and expenses on Schedule C or Schedule C-EZ (Form 1040).  It sounds like you are receiving royalties from a copyright, and not as a self-employed writer. That means that you would report the income on Schedule E, Part I. I've not used Schedule E before, but looking at the instructions for it, you enter this as ""Royalty Property"". For royalty property, enter code “6” on line 1b and leave lines 1a and 2 blank for that property. So, in Line 1b, part A, enter code 6. (It looks like you'll only use section A here as you only have one royalty property.) Then in column A, Line 4, enter the royalties you have received. The instructions confirm that this should be the amount that you received listed on the 1099-MISC. Report on line 4 royalties from oil, gas, or mineral properties (not including operating interests); copyrights; and patents. Use a separate column (A, B, or C) for each royalty property. If you received $10 or more in royalties during 2016, the payer should send you a Form 1099-MISC or similar statement by January 31, 2017, showing the amount you received. Report this amount on line 4.  I don't think that there's any relevant Expenses deductions you could take on the subsequent lines (though like I said, I've not used this form before), but if you had some specific expenses involved in producing this income it might be worth looking into further. On Line 21 you'd subtract the 0 expenses (or subtract any expenses you do manage to list) and put the total. It looks like there are more totals to accumulate on lines 23 and 24, which presumably would be equally easy as you only have the one property. Put the total again on line 26, which says to enter it on the main Form 1040 on line 17 and it thus gets included in your income." This is taxable in India. You need to declare the income and pay taxes accordingly Q: If I call a tail a leg, then how many legs does a dog have?   A: 4. You can call it whatever you want, it's still a tail. The scenario is nonsense. There is a quid pro quo, the waitress served the customer and he tipped her. A $7 tip on a $24.47 check. He was generous, but misguided if he thought that this note would let the tip go untaxed.  And even though the article you link is fresh, the author has the gift threshold incorrect. This year it's $14,000, and has been so since 2013.  A cute story, and unlikely to be an issue for $7, but the IRS would take notice if this idea gained any traction.  Two references - If Gifts Are Not Income, Why Tax Gratuities? From the Tax Court Files: Is That Money a Gift or Income?