■  Tax Liabilities For Waiters And Servers

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Tax Liabilities For Waiters And Servers

It is up to you to keep track of your tips. It is important for you to know what your employer is reporting and if it is accurate. Keep track of who is receiving a portion of your tips. This is your right. Exercise it.


by Tom Streissguth has worked for over 15 years in the legal field as a writer and legal assistant, and has authored numerous articles on Social Security disability law. He has many nonfiction and reference titles in print, including works for The Gale Group and Lerner. He holds a Bachelor of Arts from Yale University. http://work.chron.com/waiters-report-cash-tips-income-10418.html

Servers in the restaurant industry depend on tips as a large part of their compensation for a tiring and often thankless job. Of course, the Internal Revenue Service is always watching for any signs of taxable income -- and expects full disclosure of cash tips on the part of restaurant employees, as well as employers. The paperwork can be tedious and paying taxes is no fun, but the alternative approach -- hiding your tip income -- carries some dangerous risks.

The IRS makes an important difference between tips and service charges. If a restaurant customer adds something extra to the bill voluntarily, then it's a tip. If the restaurant adds the charge -- for example, a service charge for large parties -- then it's not a tip. The restaurant must distribute the service charge to the servers, report it as wages, and withhold income and Social Security taxes.
Reporting Tips

If you receive cash tips in the course of your job, the IRS requires you to report them, whether you receive the tips from a customer, from another employee, your employer or from a tip pool. Servers who receive tips as part of their job are supposed to report the total to their employers and to the IRS on their annual income tax returns. If you receive a non-cash item, you only need to report it to the IRS, as the value still represents taxable income. Form 4070A is the handy IRS form that allows you to keep a daily record of your tips; otherwise, keep a personal tip diary with the dates and amounts.
Employer Reporting

IRS rules require the reporting of tips to your employer no less frequently than once a month. The employer is supposed to withhold income, Medicare and Social Security taxes from the amount, and include the amount in the W-2 that you receive in January of the next year. If you don't make enough in wages for the employer to withhold the correct amount, then you are supposed to give the employer a portion of the tips so he can do the withholding. On your annual tax return, you combine tip income with regular wage income; there is no separate line or section just for tips. For all practical tax purposes, tips are wages; you just receive them direct from customers or other employees, rather than from employers.

If you earn less than $20 a month in tips, you are not required to report them to your employer; however, you are still required to pay taxes on them. The IRS will levy a penalty for not reporting or underreporting tips in any amount. The penalty amounts to half of the Social Security and Medicare tax that would have been due if the tips had been reported. Restaurants that appear to be evading the reporting requirements can expect an IRS audit, as can their employees.


Federal Taxes on Allocated Tips

The Internal Revenue Service (IRS) has established a minimum of 8 percent of a server's sales as the reasonable amount servers receive as tips. All servers at a restaurant can be subject to tip allocation, or individual servers might have allocated tips. Allocated tips are shown on the W-2 form your employer provides you at the end of the year. If no amount is shown in Box 12, you do not have allocated tips. If you have an amount on your W-2, you must include it in your gross income on Form 1040, Line 7, unless you have kept records of your tips and can prove the allocated tips are erroneous if supporting documentation is requested by the IRS. You also must pay Social Security and Medicare on these tips. Report them on Form 4137 and include them on Form 1040 in the space provided in the "Additional Taxes" section.


Wise up on your pay check

Your Pay check may be difficult to understand. You may wonder why you are receiving a $0. paycheck even though you earn $2.13 per hr.

A $0 paycheck happens because the amount of tips reported plus the $2.13 are needed to pay taxes. You are taxed on your tip income as well as your hourly wage.
What are the taxes that come out of your paycheck?

There are several ways the government can raise revenue. Individual income tax which accounts for 40%, Corporate Tax 10%, Payroll tax 33%, and excise tax 4%. Additionally, Custom taxes bring in another $20 billion in revenue. Sales tax, another way to generate revenue are also known as regressive taxes: where low income people pay larger fractions of their income than people with higher incomes. These taxes are employed by the government as a tool for generating income to spend on National Defense, education, and social welfare.

FICA which means Federal Insurance Contributions Act tax, is drawn from payroll taxes. Before 1935, there was no entitlement program for the general public of the US. The Veterans Relief Act was the nations first entitlement program. Then in 1935, The Social Security Act is passed by Congress and signed into law by President Roosevelt. In 1937, the first social security benefits are paid. These are one-time payments. In 1939, the program is expanded to include dependents and survivors of workers who retire or are disabled. And finally, in 1940 monthly social security payments begin. Ida May Fuller was the first person to receive a monthly social security check. She would live to be 100, and collect about $22,000 over her lifetime.

Today FICA includes both entitlement and means-tested entitlement programs where eligibility is based on prior contributions to the government, usually in the form of payroll taxes. Means-tested entitlements are granted only to applicants who are able to meet eligibility requirements such as welfare or Medicaid.

FICA draws on average about 15% from individual payroll taxes. 6.2% is deducted for Social Security benefits, another 5.3% is withdrawn for OASDI which stands for Old Age, Survivor and Disability Insurance, an additional .9% for the disability fund and 1.45% for HI (Hospital Insurance)

Employers are required to match the 6.2% Social Security and 1.45% HI. If an individual is self-employed however, they must make up the difference themselves and pay a higher amount in taxes. There is no ceiling for HI taxes, while there is a $75,000 ceiling for Social Security taxes.

Since FICA is largely based on social insurance programs where eligibility is determined on prior contributions to government: Restaurant employee labor unions became concerned. Prior to 1965, restaurant workers were required to report tips to the IRS and pay taxes but were not earning FICA credit. Instead, Tips were taxed only as a special form of income. However, after restaurant employee labor unions pressured Congress, FICA was included in taxes deducted from gratuities reported in 1965. In 1988, restaurant owners were required to pay their own share of FICA taxes as well. This meant whatever gratuities were reported, they would to match like all other employers in the work force.

Your with-holdings on your pay check will usually say :

Social Security


Federal Income Tax

State Income Tax

These with-holdings are based on your earnings. Your earnings consist of two types:

Hourly wage and Credit card tips and reported cash tips.

For example you work 48.47 hours at a pay rate of $2.13, then you would earn a total of $103.24 from hourly wage.

You made $535.00 in tips and this was reported on your pay check. $535. + $103.24 = $638.24 taxable income

In this case, $26.81 was deducted for Social Security, $9.25 for Medicare, $27.29 for Federal tax, and $5.50 for State Tax.

The total amount of taxes owed was $68.85. So when you subtract $68.85 from the total hourly wages of $103.24, then the net pay =$34.39

No other deductions should be taken out of your paycheck with out your permission. It is illegal for the employer to deduct earnings for broken dishware, walkouts, mistakes, food, or uniforms without your consent.

What should I do if my employer reports a higher amount of tips than I actually receive?

You should first point out the mistake to the employer. At this point it is very important that you keep track of your tips. If you notice your employer is consistently over-reporting tips you especially need to be keeping track.

Go to the IRS Web site. Download and print Publication 1244, Form 4070 and 4070A . This is the official document you should use to record your tips. If the employer refuses to stop over-reporting your tips, you can download Form 3949-A. This document is called a Information Referral and will alert the IRS that the restaurant is providing false information. (You can be anonymous and not reveal your identity if you choose) This may spark a investigation by the IRS or prompt an audit.

Meanwhile, its important that you and fellow co-workers document your tips. When you receive your W-2 form at the end of January and it shows a incorrect amount for total tips earned, you can download Form 4852. W2 correction form. Fill it out and submit it to the IRS. The employer will also receive a copy. If they disagree and assert that their records are indeed correct, you will then mail your documented tips from form 4070 to challenge their claim. Any other receipts, documents you receive showing tips also keep. Co-workers who also follow the same steps will help prove your tip income.

You can also contact the Tax Advocacy at 877-777-4778.

Resources Links

Wise Up On YOur Pay Check

Local Sales Rates

US Tip System