In the movie Goodfellas, Robert DeNiro’s character is based on a member of the mafia that was known to practically hand out one-hundred dollar bills. If you helped him in anyway, parked his car for him or possibly even just being near him while he was in a good mood got you a hundred bucks.
Stories like this extend even moreso to some specific poker players in modern times.
Meat of the Post: If I am so well off that I can tip a valet or someone a few thousand dollars without thinking twice about it, does that person have to report that as income?
I assume if a tip is more than a certain amount they have to report it, depending on county/state/local laws.
So second question, let’s first assume I tip them just a hundred or two dollars below the threshold of being required to report the income. What if a lucky valet gets several of these multi-hundred dollar tips from me and they just squirrel it away and later attempt to put a down payment on a decent house? Despite their reported income not showing they could necessarily afford such a down payment, or even continued payments.
They were acquiring the money through fully legal means, it just happened to be lower than the amount that requires them to report it and they’re really good at saving. What then?
Legally all money received in tips is income and has to be reported. There is no threshold, a penny tip is income in the same way that a 5,000 dollar tip is.
At the same time, though, there’s also a certain threshold that a tipped worker is automatically assumed to be making on tips, and they’re automatically taxed on that amount of tips whether they actually earned it or not.
If the IRS audits him, damn right. The one thing that really gets the IRS on your ass if if they think you’re hiding income. Taking too many deductions can get you a slap on the wrist, but not reporting income brings out the knives.
In any case, as Chronos points out, your withholding assumes that you are making a minimum tip income. If, however, you don’t make that much, then you need to document how much you did make in order to get a refund. It’s simply a matter of adding it all up at the end of each day and writing it down somewhere.
A waiter is required to keep track of and report all of their tips. I believe when credit cards are used the restaurant reports those tips for the waiter. Also since waiters make a separate minimum wage if they do not receive enough tips to equal the normal minimum wage the restaurant is liable for the difference.
The only threshold related to tips is that if you receive more than $20 in a month, you must report it to your employer, which enables them to withhold taxes and report it for you. But a tip of a penny is still something that you must declare on your own taxes.
Fortunately, if you got a $100 bill just for standing around when a mafioso was in a good mood, you’d call it a gift rather than a tip.
To Chronos: Not all tip-earning folk have allocated tips; the IRS will notify an employer if they must allocate tips. Generally, the larger restaurants have to, and the IRS may require it of others if the staff isn’t reporting “enough” tips to the employer.
To Miltonyz: Washington state breaks the standard that you describe. It requires that minimum wage be paid regardless of the amount of tips; any tip income is in addition to that. And with a minimum of $8.55/hour, they make pretty good money here.
How does all of this apply to a valet? I have zero knowledge of how valets are paid. I know waiters/waitresses have a lower per hour wage and rely, most of the time, on tips in the U.S. to fill up the rest of their monies.
How do valets get paid? Same thing? How does a regular occurrence of very large tips affect them, with regards to the IRS?
Not quite. If they keep records and can show (realistically) they made less, then that’s fine. True, generally their Withholding is set at that figure, but they can change it on the return.
IRC 61. *Gross income defined
(a) General definition
Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items: *
(In IRC 71 a list of exceptions follow, large tips from Mafiosa are not on that list)
If all you were doing was standing around, yes, it is a non-taxable gift. But if you parked his car, it is a taxable tip.
If I recall correctly, a good example is sweepstakes. If you win a prize for doing something even as minor as putting your name in a contest, the winnings are earned income. But the Nobel prize is awarded without any action or application whatsoever, and is a nontaxable gift.
I don’t believe that’s correct. I believe that in the US you do have to pay taxes on the cash part of the Nobel Prize. According to this IRS publication, you can avoid the tax if you give the money to a tax-exempt charity before receiving it.
You seem to be correct. Criterion #3 there seems to make all the difference.
But with that rule, the whole section becomes largely irrelevant, except for people who don’t itemize. If someone does itemize, then even if one fails on criterion #1 or #2, it’s no big deal: The prize is income, but can then be fully deducted. Or so I’d imagine. Is there a big difference whether it is deducted from income or excluded from income?
Yes, there is, especially in regards to tax credits that expire at certain income levels. If you win $1 million and then donate it, you may have the same taxable income as a person who excluded all $1 million, but your AGI (Adjusted Gross Income) will still be $1 million higher and you’ll lose any child tax credits, education credits, deductions for tuition and fees, retirement credits, deductability of passive rental losses, and much more.
In addition, you can only deduct cash contributions of up to 50% of your AGI to charity, which means that you’d be unable to write off the whole amount.
