I’ve been trying to get a straight answer from the payroll department of my company but it’s been rather difficult to get a hold of them, and I figure someone here would know the answer (plus the Dope is wonderful for providing multiple perspectives).
Short story: I work as a waiter and make most of my income in tips. Every night at the end of a shift, we:
-report our tips to our employer (credit card tips are automatically reported, why this is important in a second).
-“tip out” a certain (sizable) amount of what we make to our bussers, expediters, and the bar for making our drinks.
When we receive our paychecks, taxes are automatically deducted from both our hourly earnings as well as the tips we reported. Of course, the problem is that I am being taxed on money I am not making (the money I tipped out).
I am keeping a tip log already detailing exactly how much I tip out and to whom every night, as the IRS website suggests. However, I’ve read every IRS publication in regards to tipping and while they constantly reiterate how to make sure you are paying them enough, they don’t seem to care to mention how one can deduct money they were taxed on but never took home. Now you may say “just report the amount of tips you actually take home” but the problem with that is that about 90% of people pay with credit cards these days, and as mentioned above, those are reported (and subsequently taxed) automatically.
So what am I supposed to do? At years end, let’s say my W-2 shows reported tips of $10,000 but I kept my log, which I attach to my return, and it shows that I tipped out $2,500 of that. So I fill in a figure of $7,500 for income earned from tips. That should make my federal/state tax correct, and allow me the correct refund on federal/state withholdings but I paid social security and medicare on the full $10,000! How do I (can I?) get that back?
This is a tough one, and the answer is “it depends”. Are the "tip-outs’ voluntary on your account, or required by your employer?
If voluntary, the IRS would take the position (a position that any good tax expert would argue with) that the “tip-outs” are expenses, to be deducted under “Misc. Itemized deductions” on the bottom of your Sch A. However, my Bro the Tax Expert sez that he’d defend up to Tax Court* anyone that was taking the "tip outs’ “off the top” as you are doing with the cash tips. (It’s a complicated issue, and one you should discuss with your own Tax Pro. And by “Tax Pro” I mean a CPA or EA)
If required, then you need to bring that up with your employer and you employer needs to adjust the amount he is reporting to the IRS accordingly. In other words, if the credit cards show you were Tipped $200 that night, you need to show them that the busser, expediter, and the bartender got $20 each, so that your employer reports $20 to each of them, and $140 to you. You could ask your employer to do this even if voluntary, but “good luck”- it’s very likely that the bussers, expediters, and so on don’t report anything, so they’ll resist the idea.
I live in California where my employer can not legally enforce the tip-out system, but they “recommend” and it is strongly expected both by the employees and management to give 10% of my tips to the bussers, 10% to expediters, and 10% of my alcohol sales to the bartenders. So it’s technically “voluntary” in that charming “not-really-voluntary” kinda-way.
Then see what your Employer can do for you all. Maybe if you dudes all volunteered for more or less automatic “tip-outs” then the paperwork wouldn’t be so bad.
