Question about taxation on tips (US and Canada)

In the US, AIUI, servers are taxed on the basis of sales, and I remember one person telling me years ago that they have to claim 8% of sales as income. That may or may not be accurate today, but anyway. . . .

Are servers taxed on actual sales, or the bottom line including taxes?

How about in Canada, where, AIUI, tipping is not included in the bill?

ETA: And, just in case you’re wondering, I’m not some skin-flint who’s wanting to pay a certain percentage and not a penny more. I’m just curious.

In the USA the IRS automatically assumes that servers make 14% of their sales in tips (although I’ve heard 15% which makes more sense), and this is the amount that employers are supposed to report to the IRS. Bad servers will feel ripped off, or become good servers. Dishonest servers will magically have earned precisely this amount, and honest people who keep track of their money will report the correct amount.

In Ontario I’ve only ever seen a tip included on a bill in two places, neither of which I’ll never, ever return to (and no, it wasn’t a big party; just my wife and myself). I’d always understood that because waitstaff made “an honest living wage” one shouldn’t tip Ontario-ians as much as we do in Michigan, but some the of locals said 15% was expected. Or course if you ask American waitstaff, it now seems that 20% is expected (no, not just customary, but expected). Can’t say how they report, though.

It’s 8%, not 14%.
"If the reported tips from employees are more than 8% of sales, must an employer still allocate tips to the employees?

No. Tip allocation is required when the amount of tips reported by employees of a large food or beverage establishment is less than 8% (or an approved lower rate) of the gross receipts, other than nonallocable receipts, for the given period. If the employees are reporting more than the 8%, there would be no allocated tip amount. "

However, that is just a base amount. You actual tips could be more or less, and a timely kept record is what you need to keep. Note thatsome very expensive restaurants have had a tip project done on them by an IRS agaent, and thus they may assume a tip rate that’s is much higher, like say 18%.

Download or order those tax Pubs at the bottom of this cite:
"*Of my allocated tips, I tip-out 15% to the busboy and 5% to the bar. Where do I deduct this on my tax return?

You cannot deduct tip-outs (the tips you split with other employees) on your tax return. Nor can you deduct them from your allocated tips. The practice of tipping-out is one of the reasons you should keep a detailed daily log of your tips. If you documented that you tip-out, and you reported all your tips to your employer, then you do not include in your income the allocated tips in box 8 of Form W-2 (PDF).

Tipping-out, by itself, should not cause an allocated tip situation. First, when you report the cash tips you receive, you should report the total tips, then the amount tipped-out. Publication 1244 (PDF), Employee’s Daily Record of Tips and Report to Employer, includes Forms 4070 and 4070A, Employee’s Report of Tips to Employer that provides lines to record:

* Cash tips received
* Credit card tips received
* Tips paid out
* Net tips

The detail of the information provided should enable your employer to develop a reasonable, fair, and accurate method for determining whether tips need to be allocated, and, if so, how much. Employers who operate large food and beverage establishments are only required to allocate tips if the total tips reported by all the employees who customarily receive tips are less than 8% of gross sales. Thus, when there is a tip-splitting arrangement, it is important that all tips, including those received through tip-splitting, be reported to the employer by each employee who receives $20 or more in a month.

For more information, refer to Publication 531, Reporting Tip Income.


* Publication 1872 (PDF), Tips on Tips - A Guide to Tip Income Reporting for Employees in the Food and Beverage Industry
* Publication 531, Reporting Tip Income
* Publication 1244 (PDF), Employee's Daily Record of Tips and Report to Employer
* Tax Topic 402, Tips"