Yes, one has to pay taxes on tips. But who knows for sure how much cash a server receives on a given day? There are systems of estimating tips which are used in calculating payroll tax and income tax; unless the server is doing a terrible job, or runs into a lot of cheapskates, the estimated tips are often less than the reported tips. Which is fine with the employee and the employer, and the IRS generally cannot be bothered to track down the cash amounts unless they are vastly understated.
If I’m not mistaken (though I may be) tips are reportable for income tax, but have nothing to do with payroll tax. So basically the server can be taxed for them, but not the restaurant.
Who knew? I guess this isn’t an official source, but they appear to know what they are talking about:
"You must report your employees’ tips to the IRS and withhold taxes.
Employers are required to pay the employer’s share of payroll taxes on tips, plus withhold all the required income and FICA and other payroll taxes on wages and reported tips from wages actually paid the employee.
At the end of each year, employers are required to total each employee’s reported tips for the year and record this amount on the employee’s W-2 form as “wages,” along with cash wages. In some cases, employers will also be required to “allocate” tips to certain employees on employees’ W-2 forms if they have not reported a sufficient amount of tips; read on for more information."
Comes from Restaurant.org.
Other websites say comparable things.
I’ve worked as a waiter; I’m familiar with the “10%” rule and all of the other bullshit that goes on. Interesting enough, from an economic standpoint, waiters actually make more money than the nominal amount would show, because as someone previously mentioned, they commonly under report what they make in tips and therefore do not pay a percentage of the under reported income to Uncle Sam in the form of income tax.
Even more interesting that government has happily approved the system by allowing restaurant owners to legally pay less than minimum wage to certain categories of employees on the basis that their tips will make up the difference. And in so doing, they have helped create a system that increases the ease with which such employees are able to underreport their actual incomes and cheat on their taxes – no doubt increasing the frequency of its occurrence.
How’s that for irony?
Thanks so much for your explanation, C3! That’s excellent. I figured there had to be a comparative concept to superannuation, but never having visited the US I’d not have known where to start explaining it. 
Meals in SA are definitely very cheap, at least in Adelaide. We’ve got a complete ‘cafe culture’ thing going on here, and there’s a lot of choice in where to eat and lots of competition between businesses. It’s a great place for people who love food and wine. (Like I said in another thread, it’s a wonderful place to live, though I’m not sure I’d want to visit. Not much for tourists but boy it’s got a lot to offer in terms of living.)
Thanks everyone who’s responded - I’d always been perplexed by the concept of mandatory ‘tipping’ in the US but it wasn’t till I started lurking (and later posting) on here that I realized why it was so important.
I don’t agree with mandatory tipping. It’s a flaw in my thinking, and I fully admit it, but I don’t like being forced to make up someone’s wages just because their employer doesn’t feel the need to actually pay them a liveable wage. I feel happy to tip for exemplary service, for someone who’s gone out of their way to earn that extra money, but to tip someone for just doing their job, that they have to do anyway? I don’t like it. A $14.95 meal in the US is approximately $20 in Aus at the moment - what you’d pay for a main in a ‘decent’ (read not McDs, but not a ‘silver spoon’ establishment) sort of place anyway over here. We don’t have mandatory tipping, yet the employers can make up their employees wages out of what amounts to nearly the same amount of money, without having to add more on the top.
It makes me glad that I live in Australia. I can tip if I want to, I don’t have to if I don’t feel the need to. I can look at a menu and know how much I’m going to have to shell out at a glance, without having to stop and think about 10-15-20 percent or whatever.
I think that the tipping structure in the US “works”.
Servers make a reasonable living, when all is said and done. I hear a lot more griping about wages from unionized public service employees than waiters. They get Social Security taken out and pay taxes on the reported income. Some of their income is often not reported, at their choice. They always have the option of getting a different type of retail job, or food service job that is not tip based, and often do.
Customers can eat out at reasonable costs, even including the tip. Customers generally get good service, and they have recourse for bad service outside of filing a complaint.
Restauranteurs can earn enough to keep their restaurants open, and the business is very competitive, there are no excess profits to be earned here. It still takes good management to keep a restaurant profitable.
The only group in the mix that gets anything put over on them is the government, via underreported income, and they made the law that allows it to happen. I don’t think there is any reason to think a non-tip structure would fail to work, it works in other countries. However, I don’t understand the vehement objection to tipping.
I think part of what rankles me is the obligation to reward someone for doing something they should already be doing, and that their employer should be giving them recompense for. I’ve no problem with tipping for service that is above and beyond the call, or that is in some way more than is necessary. Tipping, to me, is a reward. Not a right.
I tend to agree with Sierra. It’s one thing to accept that it’s the standard practice and another to accept it as ‘tipping’.
Now if they were honest up front and called it ‘Service Charge’ that’d be one thing, but to call it a ‘tip’ makes it sound like something done just to be nice, rather than a moral, social and economic obligation.
Honestly, I hope it never catches on here. I appreciate that some exceptional waiters can make huge $$ off tipping, but I can’t help but see it in terms of gambling with people’s quality of life.
No question. I think it’s a fascinating mix. I see no particular reason why food service, out of all industries, should be primarily tip driven; it makes sense to me that (now that we’ve gotten the “tax subsidy” issue out of the way) restaurants could simply charge extra for the average spread between current bills and current bills with tips, and pay that amount to the waitstaff.
Fears of terrible service may abound because you no longer have the tip to penalize a waiter with. However, better quality restaurants will still end up paying more money to good waitstaff, and will have every incentive to monitor their performance to keep customers coming back.
One need not be an exceptional server to make a living wage from waiting tables. One needs only to be a polite, adequate server at a level of restaurant above the popular chains. A vast majority of American diners are fully used to tipping and, to be honest, really don’t have particularly high standards of service (from my POV, anyway). Politeness and composure make up about 90% of what a server needs to succeed – there really is little to no need for a server to constantly go out of their way performing superfluous tasks to ensure a tip. Nine times out of ten, that decent tip is coming.
So there’s no gambling about it – if one doesn’t have the temperment or aptitude to succeed in the restaurant industry, they should feel compelled to try something else. No one owes them a livelihood.
(Now for the “huge $$$” you mention, you’ve got to work in the right places and be very much dedicated to the profession of restaurant service. It really is a different kettle of fish, though, when you start talking about professional servers.)
Such monitoring comes at a cost, however. My experience is that servers typically work unsupervised. A “front of the house” manager, who works the dining room instead of the kitchen, is normally optional (in fine dining, the rules are different – this role is filled by the maître d’).
Even when a front-of-the-house manager is on duty, they are normally serving as an ombudsman for both staff and customers. Direct supervision of wait staff – simply for th esake of supervison – is rare.
Also agreed. For me, the sign of good waitservice is that you never really notice the waitstaff, but they are always somehow “there” when needed. Fairly silent and unobtrusive. Plates are quietly removed. Water is quietly refilled. It’s almost like they are half-vapor. Of course, they are incredibly knowledgeable, and can respond to pretty much any question regarding the food, locale, etc. They also have the ability to know when to offer information that is not asked for. High level service is really an art in its own way.
If the amount that you would have left as a tip is instead included in the price of the meal, isn’t that more manditory than tipping is? The nice thing about tipping is it’s at your discretion how much to tip.
Y’know, I wish the government would change from a tax-funded to a tip-funded system. Instead of them just taking a certain portion of our income, they should let us tip them according to how good a job we think they’re doing.
There’s tipping, and then there’s paying for a meal which should partially include the cost of the ingredients used, the skill of the chef cooking it, the pay of the waitstaff, the rental/council costs of the building etc. etc. I already pay $20 for a meal, for the privelage of having someone else prepare/serve it for me. I don’t like being obliged to pay more on top of that for someone doing their job - serving it to me. If they somehow manage to make the experience better than I was expecting, then I will reward them by putting a little extra on top for them.
The point was you pay an equivalent amount in both places for a meal, but in one you’re expected to pay more on top because the employer wants to pay their staff less than minimum wage. That’s what I don’t agree with.
Overall, it should be the same. In other words, if a meal included the cost of a wage which would be the equivilant of “low wages+tips” then the total of “bill+tip” should be the same- in other words- the cost to the consumer shouldn’t be any higher.
However, let us face facts- servers get a lot of cash tips, and pay no taxes at all on a good % of them. Thus, they in effect get a 30-50% bonus on those- and their employer* in effect* saves 10% or so- not an insignificant savings. This is the ‘dirty little secret’ why eateries don’t just pay a higher wage with no tips- the servers are cheating on their taxes. (Now, I am sure I am going to get a server or two that insist they don’t… or insist that the “calculated amount” is higher than what they really get. In the case of the 2nd, BS- because if you kept a reliable log, that supercedes the assumed amount. My Bro is a tax expert, so I am pretty sure he knows what he is talking about. In that case of the 1st- sure, whatever you say.)
However, what I don’t get is how it slipped to “20%” as a standard tip. My Mom waited tables and then the standard tip was 10%. Now true, the cost of living is WAY higher then, but so is the cost of dining, and thus 20% continues to be twice as much as 10%. And- waitstaff- you’re *not *working twice as hard as my Mom did. I agree- that 10% was too little, and 15% was a fair increase- but I can’t agree with 20%- as a standard tip. In super rizty restaurants or when the service is well above average- then sure.
I disagree about the “super ritzy restaurants” part. I’m more likely to leave a bigger percentage of the bill as a tip at a cheaper restaurant. If the prices are whopping expensive to begin with, 15% is a pretty substantial amount.
I start with 15% for no-complaints service, and increase it for any number of reasons including above-average service, or because I’ve eaten a cheap meal (particularly if I’ve done something like order water instead of a soft drink or ordered a cheaper-than-usual special, that decreases my cost but not how hard the server has to work), or because I’m feeling generous, or because it’s easier on me if I round up or throw in some extra change I’m carrying around…
Thing about this is, it’s illegal. But they still do it.
Nah - when I used to wait, I never reported what I actually made in tips - that’s because in Canada, when I was a server, the requirement was to report 10% of your yearly salary, which I did.
I made about two times my salary in tips, which, apparently, didn’t need to be reported. Go figure.
Hmm, my Brother, the tax expert, THINK that the law is really “report as a minimum 105 of your salary”. But he cheerfully admits he doesn’t know a lot about Canadian taxes, since he only does maybe one Canadian tax return a year, and that’s an ultra-simple one.