UnderCover Waitress: IRS Audits and Waitress Tips

Wednesday, September 4, 2013

IRS Audits and Waitress Tips

Ask the Waitress!
My boyfriend is a server at a restaurant. What he makes in tips in cash he, like most servers, doesn't report all of his tips. So at the end of the weekend, he will take his mix of reported and unreported tip money and deposit it into his bank account. Is this smart? What if he were to get audited for whatever reason by the IRS on his tax return?
These are important questions.

What the Law Says

First, UnderCover Waitress will never condone, advise or recommend breaking the law. Not reporting all of your income is breaking the law. All tips are considered income, including credit card tips, cash tips, and non-cash tips.

A non-cash tip, for example, would be two tickets to your favorite team's home game. A customer may give you these in lieu of a tip. If each ticket cost $10, you claim $20 when you file your taxes with the IRS. Technically, you do not need to report that $20 non-cash tip income to your employer, just to the IRS.

I discuss the details of keeping track of your tips for tax purposes on the H&R Block website. Read it here: How to Keep Track of Your Tips for Tax Purposes.

Red Flags and Tax Audits

1. Deposits

The scenario is your boyfriend works four nights in one week. Each night, he makes $100 in cash tips for a total of $400. Each night, he claims $80 in cash tips; 4 x 80 = $320. At the end of the week, instead of depositing $320 in cash, he deposits $400.

This represents one possible red flag for the IRS. There is a record of the $320 in cash tips your boyfriend made, but no record of the additional money he deposited. $80 of his cash deposit for the week is unaccounted for; if he gets audited the IRS will want to know where the money came from.

2. Percentages

The IRS expects that waiters and waitresses will earn in tips at least a certain percentage of sales. We all aim for twenty percent, but sometimes we make less. If you claim below a certain percentage, this may be a red flag for the IRS to audit you.

I don't want to incite panic; if you have a bad night it does not mean you are going to be audited.

Long-Term Considerations

Beyond this scenario and the problems your boyfriend will face if he gets audited, there are other, long-term concerns.

A worker's future social security income is determined by how much money he made and claimed on his tax forms. The less the IRS thinks you made, the poorer you will be someday when you depend upon social security.

If you want to save or invest money, you create a record of that money. It may be better to claim your income and use it wisely than to have unaccounted for cash lying around.

Hope that helps, and thanks for asking the waitress!


  1. I would never have even thought of any of this! Wow....

    1. True story, although I never worked there I know people who did: Restaurant got audited. This resulted in all the wait staff who had been not claiming all of their tips getting personally audited. The financial burden was back-breaking; these are people weren't getting rich to begin with, and the fines they got to pay for breaking the law make a huge dent in their ability to make ends meet.

      Seems easier, in the long run, to just be honest, look better to banks the day you need a loan, and a better social security payment in the future.

  2. Replies
    1. AND... got word today that some IRS rules for restaurants are changing. I'll have to post about that soon.


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