Tips and the IRS

I go out for a fair number of "group dinners" where we all end up dividing up the bill at the end of the evening. Tipping gets to be something we discuss quite often. Every one of us has a different point of view on tipping and as you might imagine it gets to be something we think about while writing out the bill. What if one of us wants to tip 20% - but another person only tips 10%? Now whe the bill is done one person thinks it makes our group look like a cheapskate group while another person thinks we are being extravagant.

Part of what this comes down to of course is how it affects the waiter's finances. Most waiters earn less than minimum wage as their "base salary" because the restaurant assumes they will earn enough on tips to make up the missing money. Depending on your point of view, the waiter should be earning another 15% - or maybe another 20% - of their average table bill to pay their rent. Also, the IRS assumes a waiter is going to earn X amount in tips. If the waiter does not claim that much, the IRS will penalize them and assume they're lying.

Or is that true? Someone else claims that the IRS assumes the waiter makes 18% tip and anything above that they can keep. But how could the IRS possibly know what a given waiter served for meals in a given year, to then calculate the 18% they "should claim" in income? Do they take the total meal income of the restaurant for the year, divide by the number of waiters, and then calculate 18%? Does a restaurant's tax form even have a spot for just "meals served" in a box? I've not seen any business tax form that had the numbers broken out like that. If anything I believe the tax form has a spot for "sales income" which would include take-out from the restaurant as well ...

Then there is the problem of tip sharing - in many restaurants when you pay a tip it doesn't just go to that waiter you give it to. He has to share it with the bus boy and other staff, to thank them for their help in servicing the table. How does the IRS deal with that?

The IRS Knows All

As you might imagine, the IRS wants all money they can get. They even have Publication 531, Reporting Tip Income. To read the raw version, go to IRS Publication 531 - Reporting Tip Income. They require waiters to report MONTHLY to their employers - day by day - exactly what tips they get. That number they report is what they MADE, so tip sharing situations are already taken into account. They only report what they kept at the end of each day.

The ONLY time a waiter does not have to do this monthly reporting to his employer is if he makes less than $20 in tips in a given month. He still has to report this income to the IRS! They are just cutting down on the monthly reports a waiter has to make if he is only earning a little amount because he is just getting started.

So to summarize, the waiter tells his employer EVERY MONTH exactly what tips he has brought in. The employer then reports this information to the IRS. The waiter must pay taxes on ALL income he earns including every penny of tips. The IRS will definitely be suspicious if a waiter claims to only get $5 in tips every month - but the IRS will not innately "penalize" a waiter for earning X amount rather than Y amount in tips. That waiter will probably be audited, though. Conversely, a waiter doesn't get a "good waiter bonus" for earning over X amount in tips! The waiter must pay taxes on ALL income earned, every month.

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All content on the WineIntro website is personally written by author and wine enthusiast Lisa Shea. WineIntro explores the delicious variety and beautiful history which makes up our world of wine! Lisa loves supporting local wineries and encouraging people to drink whatever they like. We all have different taste buds, and that makes our world wonderful. Always drink responsibly.