For those that collect tips on their job, there can be a lot of confusion. Are they taxable? Which industries are required to report? Can I just use a percentage? Does it matter?
What you need to know about restaurant tips. A relative of mine started a new job at a coffee shop and while getting trained on the end-of-shift procedures, she was told to just enter $0 in the tips received line because “No one bothers with this”. Much to my surprise, she was directed to do this from the trainer who is the district manager responsible for training the new hires throughout their territory. Uh-oh! Could the trainer, company and my relative all be headed in the wrong direction?
Let’s start with the main point. Tips are taxable.
Not sometimes, not partially and not a percentage. Every dollar you retain in tips is 100% taxable. I say “retain” instead of “receive” because any amount you tip-out to other employees comes out of your taxable total. One common misconception in the industry is that you just need to report 8% of your total receipts. While there is an 8% rule, it applies to the employer not the employee, and is completely unrelated to the employee’s requirement to report their tips.
This doesn’t just apply to food wait staff like many people think. If you receive a tip for any reason, it would be considered taxable. Salon workers, blackjack dealers, taxi drivers, valets, and concierges are just a few other positions where tipping would need to be reported.
Let me be clear – I don’t work for the IRS. While this blog might sound overly regulatory and burdensome, I promise I wrote this blog purely for the sake of the employee! Incorrect information is not a defense in front of the IRS. My relative could potentially be hit with a 20% negligence penalty plus interest on any underreported amount related to her tips, even though the district manager told her “no one bothers with this”. Also, the IRS is searching for money and has identified tipped employees as a lucrative audit. Many audits start with a review of the employer’s W-2 submission in order to identify any employees that are not reporting or potentially underreporting.
My tips for you?
- Keep a log. Put in daily what you received and what you tipped out.
- Start now. If you haven’t been reporting in the past, it’s best to start complying as soon as possible.
- Call us with questions!
Somebody must “bother with this” so if you collect tips, be certain you are correctly reporting them!