Set me straight, Dope. I heard from an accountant that income tax on tips is calculated at 15% of the meal price (so if someone doesn’t tip, the server has to pay income tax on the non-tipped amount anyway). A former restaurant worker says that income tax is calculated on the value of the tips themselves. Which one is right?
The former restaurant worker is correct. Its taxed like normal income.
(I hope this guy isn’t your accountant)
You’re supposed to pay taxes on your total income. Tipped restaurant employees are supposed to report tips to their employers, and some employers are required to make sure that tips reported to them amount to at least a particular percentage (8% or less) of certain receipts ( not including carryout, for example). If the employees report less than that percentage , the employer is supposed to allocate the difference among the employees. I would be surprised if the employees of any restaurant where tipping is customary received less than 8% overall in tips- yes, there are people who don’t tip, but there are also people who tip 20%.
The accountant is probably talking about something slightly different - (s)he is probably referring to a number that will not raise any red flags with the IRS. If a waitress reports tips of 15%, there is little chance the IRS will think she is hiding income.
Does the IRS even know the total values of meals served by a waiter/ess? Sure they may well know the total receipts of a restaurant, but do they know how to allocate them amongst the personnel? Aren’t tips shared with busboys etc? if the average tip is indeed 15%, the server is not necessarily getting it all even if you did have a server-by-server allocation.
They don’t know from the waitpersons forms. But employees are supposed to report all their tips to their employer, and the employer reports them to the IRS, so I’m sure the IRS checks and makes sure that the total amount of tips are in-line with the total amount of receipts, and if they aren’t they may start looking more closely at individual employees (for example, if one waiter reports much lower tips then the others)
But that’s a pretty long way from what the OP’s accountant appears to have been saying.
They find out when they audit you. So, better self-report accurately.
This implies that waitstaff keep a record of the value of the food they serve each year. Which sounds dubious.
A server is required to keep track of tips. In Canada, they add these to the income they report at the end of the year themselves. In the USA, I learned in an earlier thread, they have to report tips to their employer who then forwards the appropriate amount of income tax to the IRS.
As mentioned, if the IRS wonders what is happening (or pick you randomly) they can do an audit. The amount of a tip on a credit card is easy to find - they can tally these up and say “tip percentage appears to be $X for sales of $Y.” They can project this to cash sales. If you reported tips a long way off this number, they will assume you are lying, I guess. Then you pay a penalty on top of outstanding taxes.
they probably do preliminary filtering based on accumulated statistics - if you work at Applebee’s, you should have reported a certain tip rate. A different number might apply for the Ritz Fine Dining, or IHOP, or Joe’s Greasy Spoon Diner, etc.
However, tips are income from a job, and taxes are calculated the same as any other income.
the stick of the carrot-and-stick approach is the penalty fine. The carrot is the warm feeling that you’ve done your civic duty.
Theoretically I suppose the IRS could get the value of food served from the restaurant, if there are good records. I assume this is stored in some cases; whenever you have a receipt saying YOUR SERVER IS X that information was recorded at least temporarily.
More simply though, if you get audited and your reported income doesn’t match up with how much you’ve spent and what goes through your accounts, the IRS will notice. If you’re under-reporting a bit of cash that you use to buy coffee every so often you might get away with it, but if you’re under-reporting by most of your rent payment the IRS will want to know where you got the money from.
Servers are not the only ones affected by this rule. Cocktail servers in casinos have the same problem and the casino keeps track of every drink they serve. If they are working in nickel slots they are in big trouble. There is usually a minimum threshhold that they must report or risk getting audited.
I guess this brings up the question of what are the legal requirements for a restaurant to keep records for any audits? Obviously, Joe’s Diner with a discardable paper chit system is going to have a lot less “traceability” than a modern high-end restaurant with a visa machine and a wad of transaction records that include charge and tip given on Visa. Records need to be kept not just for tips, but for sales taxes, etc. Fail to keep records, and how can you contest any re-assessment or audit? Don’t keep the Visa slips and you can’t contest a customer who says “I never signed for that charge”. There’ a decent amount of bookkeeping involved in any modern business.
Obviously, cash tips are the least traceable and the hardest to determine, but over hundreds or thousands of customer, stats and averages cary a lot of weight.
the “Net worth assessment”, IIRC, I have only heard of coming into play for drug dealers and other organized crime types - “how can you afford a luxury penthouse and Ferrari on a dock worker’s wage, when you’ve declared $30,000 of income?” Unless the person is habitually putting their undeclared savings into the bank, or takes out nothing of their wages, it is not usually obvious there’s a problem. You’d have to have a pretty extravagant lifestyle.
The IRS can actually require employers to calculate “allocated tips” - this generally happens when a restaurant routinely reports low tips relative to wages. In a restaurant with allocated tips, the wait staff still report actual tips to the employer, but anyone who reports less than the allocated amount is still treated as receiving that amount. (So, yes, that means that if you leave a $0 tip, the waitress is still paying tax as if you had left a tip.)
I’m not sure whether 15% is likely as an amount for allocated tips. It’s an area I know about in theory but have been lucky enough to avoid with my restaurant clients.
That said, the tax calculation would work like this:
Meal price: $1,000 (over a night, let’s say)
Allocated tips: 150
FICA tax on tips: 11.48 = 150 * 7.65% (the employee share, withheld from wages)
Income tax on tips: 22.50 = 150 * 15% (15% being an estimate. 0% to 35% is possible.)
The percentage for allocated tips is 8% unless the restaurant and/or wmployees apply for and receive a lower percentage. As long as the combined staff reports tips over that percentage of the applicable revenue, there is no allocation.
Is this why the “suggested” tip amount got jacked up to 20% in the last 10 years or so? (From 15%, previously 10%?)
Their employer does. That’s why the server’s name or number is on every check.
This. I worked as a waiter for a couple of summers during the mid 1990s while in college. Our aggregate sales for the year were on our paystubs (although this doesn’t necessarily mean that this figure was automatically provided to the IRS).
On a related note, the restaurant I worked at was part of a chain located throughout New England and maybe one location in NYS, I believe. The second summer that I was employed there, all employees had to attend a presentation by the chain’s CFO on the importance of reporting tips accurately for tax purposes. It was stressed to us that the presentation stemmed from the IRS determining that the chain’s waitstaff, on average, was underreporting tips, and that the company would be hit with a seven figure (>$1 million) fine if it failed to increase reported tips to an acceptable threshold, which IIRC was the 8% benchmark mentioned earlier in this thread. As I said, this was a regional chain (a couple of dozen restaurants maybe), not TGIF, Olive Garden, etc., but the details of the situation seemed to indicate that the IRS was taking action because the chain was big enough to make it worth doing so.
That being said, our assistant manager could barely stifle his laughter long enough to coherently explain that waitstaff were expected to accurately report their tips when training a new hire.
Not at all. My wife keeps track of hers, because she also is allowed to take a deduction for the part of the tip she is required to tip right back out to other staff, such as busboys, hostesses, etc. This year that amount was north of $4500. :eek:
I think that might be the point too. In theory you are required to report and pay tax on all income that is not excluded by law. In truth, if the IRS doubts the numbers you provide, they can make your life miserable as they laugh as they garnish your bank account and paycheck and trash your credit report while you dash around trying to figure out how to prove that your income was really that low, honest.