UnderCover Waitress: December 2014

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Sunday, December 21, 2014

Never Pay Tax on Other People's Tips or Tip Outs

Ask the Waitress!

This problem is one people write to me rather often. This is unsettling because every time someone says, "this is happening," we have another restaurant owner breaking the law.

Here is a good example:
Hello Waitress,
My employer is taxing me on 100% of my tips on my paycheck and giving them all to me but......is telling us to tip the bussers and bartender 25% of our wages, yet they are not taxing the bussers or bartender on any part of that 25% and they are telling us we are required to pay them their percentage of the tips when we get our paycheck.  I want to tip the bartender and bussers, that is not an issue. 
So if I make 500$ in tips, i will receive all $500 on my check and will be taxed on all $500.   Then I am expected to hand out $125 of that money. The bussers and the bartender are not taxed on this.  
If you make $500 but have to tip out $125, then you pay tax on $375. The recipient of your tips pays tax on the $125.

Internal Revenue Service

The above law is via the IRS and applies to all fifty states. It does not matter whether you earn a tipped minimum wage or full minimum wage, the IRS requires you to pay tax on your own income. They do not require you to pay tax on other people's incomes, and they don't allow your employer to tell you to pay somebody else's income tax.

IRS Publication 531 was last updated in 2013. It states clearly that your employer may use an electronic tip record to record daily tips, but that if he does, he must give you a paper copy.

Under "What tips to report," the IRS writes:
If you participate in a tip-splitting or tip-pooling arrangement, report only the tips you receive and retain. Do not report to your employer any portion of the tips you receive that you pass on to other employees. However, you must report tips you receive from other employees.
Therefore: you do not report money you don't get to keep, AND those who receive tips from other employees must claim the money for themselves.

Another handy page at the IRS website is "How Do You Report Suspected Tax Fraud Activity?" There are forms you can print and fill out, and you are allowed to remain anonymous if you choose. You may use this resource to report a business you suspect (or know very well) is guilty of not complying with tax laws.

Thanks for writing, and best of luck.