Which item is reported to the IRS as employee income?

• A. Tips received by an employee
• B. Money paid to vendors for products
• C. Operating expenses paid by the salon
• D. Change given to a client following payment

Answer: (A)

Tip income is income that must be reported to the IRS as part of an employee's earnings. In a salon, staff who receive tips from clients must include those tips when calculating taxable income, and the employer reports total wages including tips on the employee’s Form W-2 for withholding and year-end tax reporting. Other items listed are not income to the employee: money paid to vendors for products are business expenses paid by the salon; operating expenses paid by the salon are costs of doing business; change given to a client after payment is cash returned to the customer and does not become the employee’s income.