Which of the following items must be reported 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)

Tips earned by an employee are considered income and must be reported for tax purposes. They are part of personal compensation and are subject to federal income tax withholding, Social Security, and Medicare. Employers typically track these tips and report them to the IRS, ensuring accurate tax handling for the employee.

Money paid to vendors for products isn’t the employee’s income; it’s a salon business expense. Operating expenses paid by the salon are likewise costs of doing business, not pay to the employee. Change given to a client is simply a cash-handling element of a transaction and doesn’t constitute income to the employee unless it’s a tip, which would already be accounted for as income.