UnderCover Waitress: Pay Tax on Tips

Wednesday, February 1, 2012

Pay Tax on Tips

The first income tax in the United States of America was levied in 1862 to help pay for the Civil War. This initial income tax was a progressive tax, meaning those who made more paid a higher percentage of income tax to the government.

It's been a long trek through history to get to where we are now. Mitt Romney paid less than 15% of his income in taxes. The highest percentage of income paid to tax today 35%, but the rich don't pay it thanks to various tax loopholes, many of which were put in place by George W. Bush.  Some members of the middle class do pay 35%. It's harder to make ends meet when you don't have wealth stashed in foreign bank accounts.

If memory serves, tips were not always considered taxable income. While I believe the idea of requiring waitresses and other tipped employees to pay income tax on tips is relatively new, I had some difficulty finding information on the exact year it started. However, a law was put in place in 1983 that required waitresses to be taxed on 8% of their sales. That percentage has gone up. This is why stiffing the waitress actually costs her money; she has to pay income tax on money she didn't make.

Enough about history, let's talk about paying taxes on income earned in 2011.

All tips earned, whether by cash, credit card receipt, or check, are considered taxable income.

Employees must report tip income to the employer, and the Internal Revenue Service provides forms for download. If your restaurant has a Point of Sale (POS) system, you probably report tips at the end of every shift directly into the computer before you sign out. If you still place orders by hand, you probably fill out some form or other telling your employer how much you made in tips. And some employers keep track of it themselves and divvy out the earnings at the end of the shift.

The bottom line is tipped employees are required by law to report all tip income when they file their federal income tax. If you report less than a certain percentage, the IRS may assume you are not being truthful.

The rules are strict regarding what expenses may be deducted. I know it's a bummer, but I explain in Give Waiters a Tax Break why those $120 Dansko clogs, which make waitressing so much easier, are not tax-deductible. Sorry for the bad news.

There are services available to low-income tax payers. From the Internal Revenue Website:

"The Volunteer Income Tax Assistance (VITA) program is designed to help low-income taxpayers... Many VITA sites offer free electronic filing and all volunteers will let you know about credits and deductions you may be entitled to claim. To find the nearest VITA site, call 1-800-829-1040."

In addition to VITA, Low Income Taxpayer Clinics are free services for low income taxpayers who are having trouble with the IRS. Trouble can be expensive, so:

"For more information, see Publication 4134, Low Income Taxpayer Clinic List. This publication is available at IRS.gov, by calling 1-800-TAX-FORM (1-800-829-3676), or at your local IRS office."

Good luck and happy filing.


  1. I started a reply in MS Word and it turned into two pages. LOL

    So I'll just create a post later on and link your article. I have to say, I'm a Romney fan! But the whole tax situation is so convoluted, I wish they'd scrap it and start all over with a flat tax across the board and then a consumption tax.

  2. I look forward to reading your post. The saying that "great minds think alike" isn't always true. Life is much more interesting when we can throw all sorts of ideas on the table, and remember that there are usually more than just two sides to any issue.

    I agree re: scrapping the whole, convoluted system an starting again from scratch. I would go for a progressive tax and a consumption tax, however.

  3. In an ideal world, that sort of thing wouldn't be taxed at all.

  4. It's sad to think that almost all things that involve money need to be taxed. I hope that the government will be able to reform this law. I think that it would be a better idea for each establishment to treat tips as non taxable income. I filed my ITR last April, and I paid a certain amount. I also have a small business that involves vehicles. I'm glad I have a lawyer to do the things related to filling out and filing the irs form 2290.

  5. @Janice: Thanks! :-)

    @Anne: Respectfully, I think that paying taxes is intrinsically a good thing. It is how a society pays for social services. What I think needs to be reformed is who pays taxes and how much. Our current system punishes the poor by making them pay the greatest percentage of their income as taxes; meanwhile, the extremely rich pay little to no taxes on their various income streams. This is backwards. If we started taxing the rich, small business owners who are struggling would have it easier, not harder.

    1. You've got it backwards. 47% of working people pay NO federal income tax at all.
      If everyone paid 15% of their income, wouldn't a millionaire be paying more money in taxes than someone making 15,000 a year?
      People who make low wages always think taxing is a good idea, as long as it is someone else paying the taxes. Keep in mind that the millionaire probably owns the business you work at.

    2. I don't have anything backwards. I also cite my sources via links in my posts; I am curious where you got your 47% statistic (please feel free to share.)

      While fifteen percent of a million is more money than fifteen percent of one hundred, when millionaires pay a lower percentage of their money in taxes than the middle and lower classes, that is grossly unfair.

      Nobody gets rich in a vacuum. Social services such as roads, public transportation, police, fire dept., etc. make it possible for citizens to go to work to support themselves and their families. I cordially invite anybody who disagrees to stop using any and every service that is funded via taxes. Please do not:
      go to public school
      take out a federally funded school loan
      visit the library
      drive on public roads
      call 911
      use public transportation
      In return, we won't bother asking you pay taxes.

    3. Wow, have you been brainwashed by the Democrats. I would prefer to keep my money and send my children to a private school (public schools suck), with more money in my pocket would not need a federally funded school loan, 911 is of no help--show up too late (give me a gun to protect myself immediately), if I have more money I can buy a car and not use public transportation. Yes, don't bother me to pay any more--I pay enough!

    4. Well, Nathan, then I strongly suggest you break the law, don't claim your income as taxes and take the risk that you will get audited. When you are audited, you will be bled dry by the IRS. And the private companies that negotiate with the IRS won't be able to help you, because you deliberately and knowingly broke the law.

      Regarding the rest of your comment, I am still unclear as to where you expect to drive your brand new car if the roads are not maintained...? But then, I am just a stupid waitress, and therefore, am easily brainwashed.

  6. You've got it backwards. 47% of working people pay NO federal income tax at all.
    You've got it backwards. 47% of working people pay NO federal income tax at all.

    Well - I'm not sure on the numbers but this seems to be fair. However, it should be noted that the 47% of working people pay no federal income tax at all statement might confuse some. I was part of that group for many years - but I did pay federal income tax, it was then refunded back to me when our family filed our yearly taxes. We often got more than we paid via credits.

    I prepared tax returns for 5 years and during those years, I ran into lots of situations where upper middle - rich range paid a lower % range in taxes, but in a nut shell it's far more money collected than the percentage rate itself. I feel for the waitresses that had allocated tips on their W'2s - I prefer that waitresses get paid more hourly, however I know many waitresses that love getting tips, I suppose it's where you work.

    I'm older now and I'm in a higher tax bracket, it sucks but it's progression. I'm fine with it because I was at the bottom, but please take responsible for being in that group by not voting to raise income taxes on those that have to pay without getting it refunded back to them. Ironically - I might be in a higher income level now but with all the taxes I have to pay.....I'm really no better off than I was when I was making a lot less. Does that make sense? I had money when my family of 4 was making 40k, paying little taxes (have to pay ss, medi, state taxes still) getting about 6k back in income tax refund........now I'm making 100k and now half of what I make is a tax federal and state, so I'm making the same amount but just stressed out seeing those numbers. Life isn't fair and it never will be.

    1. The answer is not to suggest the poorer people cheat, the answer is to implement a system that is fair. The current system is not fair. Too many people wrongfully believe that "income" is simply salaries, wages, and tips. The rich's "income" is based in investments, capital gains, interest income, and types of income that are not currently taxed the way the working class' income is taxed.

      Obama wants to go back to taxing the rich's income. Romney wants to protect the interests of the rich by not taxing their type of income, repealing services for the poor, and requiring the middle class to carry any remaining tax burdens. This, with no help paying for health care.

      I will never understand the rantings and ravings of the poor who vote Republican. Certainly not in this upcoming election, anyway.


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