milroyj:
Good question! Here is the way it was done at any establishment I worked at, in Virginia and North Carolina, though it may be different depending on the establishment - possibly because of the jurisdiction, though I don’t think the policies I am expounding upon are legalistic, as I will explain.
A server is supposed to declare every penny of their gratuities as income. The IRS dictates this, and not just for servers, but for everyone, as you are no doubt aware.
Most of the chains I worked for had a minimum amount you could declare at the end of your shift (or weekly), which was 8% of your sales. This figure came about because it was decided that declaring this amount made an audit less likely.
As such, if I had $800 in sales, I could declare no less than $64. This would go towards my income, which would then be taxed appropriately and taken off of the paycheck. It was not uncommon (and still isn’t) for servers in high-volume restaurants to get voided checks, as the taxes taken out based upon income derived from tips are more than the $2.13 an hour most servers make.
Even if the tips were all on credit cards, the server could declare anything they wished - even less than 8% theoretically. However, since an entire restaurant could be audited (more on that in a moment), the restaurants, while they cannot FORCE an employee to declare anything (more or less), have it in their best interest to avoid an audit.
FACT: People who identify their employment as a waiter or waitress are more likely to get audited than any other profession at the relatively small income bracket servers reside in. Because the IRS is not stupid.
Where the credit card tips come into play is IF a server and/or his employers is unfortunate enough to be audited. Then, they take the percentage on credit card tips and the IRS will arbitrarilly use that as a benchmark. As you might guess, this has a potentially devastating effect on the servers and employers, since even the worst servers will make at least 10% - I cleared around 18% as an overall lifetime average.
I do not wish to get into the morality of not reporting actual income to the IRS. To be sure, many other people who make far more money than servers are as guilty of not telling the IRS everything they make.
Still, for the vast majority of servers, it makes no difference, since even with a greater percentage of servers being audited, it still is far from an overwhelming majority.
I once waited on tables at a place that had had an audit a year or so before I was hired. I heard about it. It was ugly. The IRS took over the place for a month or so, pouring over records, and then handing servers a large tax bill which they could not appeal, and had to pay. Meanwhile, the establishment was hit with a major fine for allowing it’s employees to under-report their gratuities.
So, in a nutshell, if you REALLY find the underreporting of tipped income to bother you, always tip on the credit card in the rare chance the IRS gets involved with that server or establishment. But it probably doesn’t matter either way.
Yer pal,
Satan