Not sure if this belongs here or in P&E. Both Trump and Harris have proposed eliminating taxes on income from tips. I generally favor increasing minimum wage, and just about anything that will enhance the standard of living for service workers.
But I’m just unsure how exempting taxes on tips would work. Can I ask my employer to reduce my pay to minimum wage, and make the rest up in a generous tip? Would contractors offer to perform work for free, so long as the customer tipped the expected cost of the service?
How would they identify/restrict the occupations which are covered?
I did not ask but this was common practice when I was a waiter back in the late 80s and early 90s.
The restaurants paid below minimum wage (which, at the time, I think was $3.50/hour). Instead, they paid me $2.01/hour. The rest I made up in tips. If, for some reason, I made less than $3.50 with the tips the restaurant would have to make up the rest to minimum wage (but that never happened and if it did they’d probably fire you for being an awful waiter).
Of course, back then we had to report our tips as part of our income to be taxed.
Which, ISTM, if tips will not be taxed then the restaurants will have to pay all staff at least minimum wage which will be taxed.
And what about credit/debit cards. If I add the tip to the bill, then sign, the employer has to pay the cash and then get ‘reimbursed’ from the merchant account. Is/should that be taxable income?
There is not a lot of risk to the employer. Debit cards, when used like this, act like a credit card Which is why most have a VISA or MC stamp on them. If it is true debit then the money is withdrawn at the time of the transaction. The merchant has the money immediately. If you do not have enough in your account then the transaction fails.
The employer pays a fee for every CC transaction but, in return, the credit/debit card bank promises the merchant will get the money unless the person reverses charges (and that is rare). Part of the risk the merchant assumes to do business.
In my case, as a waiter, I was my own bank. At the end of the night the restaurant had a record of all the things I sold and provided me transaction list that said I owed the restaurant $XXX.xx at the end of the night. I then handed in all my CC receipts and added those up then added in whatever cash I had on hand to make the account balance. Whatever was left in my pocket was a tip for the night. (If there was a dine-and-dash you’d tell the manager immediately and, usually, they would credit your account so you did not have to pay for that).
ETA: These days, where cash is far less common and most transactions will be electronic I do not know if the employer keeps a tally of your tips and adds them to your paycheck or if they cash you out at the end of each shift. I am guessing the former.
I cannot find it (with an admittedly quick search) but I think there was a recent(ish) court case where the court said if a restaurant applied an automatic tip then it really works as a wage. Which, in that case, meant the employer could skim some of those tips legally as long as the employees got at least minimum wage.
I think that’s going to be a bright line rule at least.
Add 3% for “Employee Welfare Fund” it’s not a tip, regardless of whether the money is passed on to the employees.
“15% gratuity added to all parties over ten persons” its not a tip.
“$4500 to me for the fence or $3500 to me and $800 to my employees, your choice,” its not a tip, unless I can decline to pay the employees.
We have an ice cream shop at the beach that has a sign that says “College Fund Donations” on the tip jar. It does get shared by the employees, and the employer knows exactly how much each employee is getting, but does not report it because it’s a “donation” not a tip. No one is fooled and if the IRS or state DOR could be arsed to enforce it they’d be in trouble.
You can’t avoid taxes by changing the name of something. Magic words in taxation only exist in the fraudster’s or fool’s mind.
But if they have two jars half full of money, one with Luke Skywalker and one with Captain Kirk, and there’s a sign telling you to vote for your favorite SciFi series, that’s just democracy.
You can’t avoid the taxes by the name of something, but in this case you can avoid taxes by changing the nature of the something. It won’t work for anything that someone wants to set a price for , so I’m sure the fence example won’t work - but what about someone who is shoveling my snow/mowing my lawn/ parking my car as a valet? What’s to prevent them from “working for tips” rather than charging me a price?
So to be clear, in this situation, if they shovel snow or mow a lawn, and then the customer says “Gee, thanks!” and shuts the door in their face - that is:
Totally cool, they were working for an optional tip, and are happy to do it for free if you don’t feel like tipping
Unless it’s a bona fide business doing this, I’m doubting that any income gets reported. If the neighbor kid mows my lawn, charges me 40 bucks, and I give him 50 and tell him to keep it, do you think he’s reporting that on his income tax? Hell, he’s probably not even filing.
I’m sure it’s not currently getting reported if some kid does it , so yeah, I’m talking about a “business” - even if that business is one person. But if I work for tips and I don’t have to pay taxes on tips, I wouldn’t be reporting any tips on my taxes, even if I’m earning $50K in tips right? I don’t really buy the worries about financial advisers or lawyers working for tips - but I can absolutely see people mowing lawns and shoveling snow and parking cars and checking coats for 'tips" and taking a chance on getting stiffed because most people will not stiff them , just like servers now accept a subminimum wage and the chance of getting stiffed because most people don’t stiff them. So I think there is going to have to be some rule other than " if it’s optional, you don’t have to pay tax on it"
If you can really not pay them any agreed price, it’s really a tip.
If you’re agreeing in advance what you will pay, it’s not a tip.
It’s very simple. Tipping is legally optional.
I can walk out of a restaurant having left no tip. I cannot walk out having not paid a service charge, no more than I can if I didn’t pay the tax or the price of the drinks.
Currently, an employee is required to report his tips to his employer, who then includes them on his W-2 in the appropriate box. Presumably the Harris/Trump plan would be as simple as removing those amounts from your AGI. (And, I’d suggest, that the guy shoveling your drive probably isn’t an employee and therefore cannot get tips; but also probably isn’t reporting his income anyway).
There’s certainly the prospect that you’ll lie about the allocation. But, right now, we seem to generally assume that the employee isn’t going to report the tips at all (in order to evade the taxes), and I don’t see how this could be worse on that front.
And, the IRS already tells us what is required to be a tip:
The payment is made free from compulsion.
The customer has the right to determine the amount of payment.
The payment isn’t subject to negotiation or dictated by employer policy.
The customer generally has the right to determine who receives the payment.
Nope - but the handyman who uses my lawnmower to mow my 20 x 50 yard or who weeds my even smaller front yard might. Although I have no idea if those people currently report their income.
I don’t know about that - plenty of hairstylists are self-employed and still get tips.
I wouldn’t assume that- if they aren’t taxable, why would they be reported on the W2 or any other tax form at all? I don’t have to report a birthday gift from my mother - why would a non-taxable gifts from customers be on any tax form?
Well, no. Currently if someone works in a tipped occupation, they are going to have to report at least some of their tips - their employer is going to want to be able to show that they earned at least minimum wage if there is a tip credit and if the total reported by all employees isn’t at least least 8% of the revenue the employer has to allocate the difference among the employees. They probably don’t report all of it. And how it’s worse is a simple matter of fairness - the minimum wage worker at Target (and pretty much everyone else) has to pay taxes on everything they earn while the servers won’t even be expected to.
Fair point. I wonder how a hairstylist reports income. The other counter-point I thought of was a pizza delivery driver who is only paid tips (that was a thing when I was in college, may not be anymore). I’m not sure I view that as a gratuity on top of the payment for service.
I report non-taxable income. For example, I get income from some municipal bonds. I get a 1099 that has a box for “tax-exempt interest.” It goes onto my 1040 under the same; it’s counted as “total income” and is deducted from the AGI.
We don’t require donees to report gifts received, and do require donors to report certain gifts, but only over a certain amount. While that explains your birthday gift from your mother, but that’s just a policy choice.
You already have to report your tips to your employer and have to put (on your 1040) any additional tips not reported (Item 1c). If you want remove tips from taxable income, you just change the calculation to omit them from your AGI.
I meant worse as a matter of enforcement or administrability. I’m not offering an opinion on whether or not tips should be taxed. But we already have a regime where we permit (even openly support) the tipped worker underreporting his income, but the Target clerk doesn’t get to do that. (And the cash-only day laborer mowing your lawn may well not report any of his income).