Topic: Service Industry people - tax questions

[greenjeans]

Helping my nephew out with his taxes.   He started working at a bar 8 months ago.  At the end of the night, tips are pooled and counted by a manager and then distributed to the employees. The employer reports that money to the IRS.  They are also paid $4 bucks an hour.    On his year end W2 I noticed he had only $15 withheld for federal Income tax.  For 8 months of work.   Social security and medicare taxes were taken out and appear normal.

I was under the impression that if an employer reports 100% of their employees tips to the IRS, they are also supposed to collect the taxes on declared tips from money they would pay the employee in hourly wages.  They have a payroll service.  They get their check for hourly wages 2 weeks after the actual work.   It seems in that time it would be very easy for the payroll company to figure those taxes and take them out of his payroll check. 

Is that not how it works ?     Are tipped employees supposed to save a percentage of their tips for year end taxes ?   Seems like that burden should fall on the employer. 

Anybody have a handle on this ?    I have always thought it was shady that the manager counted the employee tip jars.

[chewbacca5000]

  I have always thought it was shady that the manager counted the employee tip jars.

If he is counting and reporting tip money to the IRS then he is also putting himself in a place of responsibility to pay those taxes I would think.  I have never even heard of restaurants doing anything like this.  I always thought it was up to the restaurant employee to declare their tips to the IRS.  Never heard of what the manager getting involved.

[calj737]

Chewy is on the right track. Tips are reported as % of sales for Service Industry. For instance, if he sold $100 of food, then it would be expected that he would receive 15% tips normally on that. the 15% is multiplied times 80% of his total sales, then that number 15% of $80 is reported to the IRS. The taxes on that $80 is not withheld by the Employer because it is a cash transaction.

Your Nephew will be responsible for paying the tax on his TIP wages. Some Service people avoid reporting their income but in fact do themselves harm. For instance, getting a LOAN depends upon documented income history. If he only "made $8k" annually due to $4/hr, no Lender will grant him a loan. By declaring TIP INCOME, he raises his GROSS income despite being responsible for the taxes at the end of the year. At least he is building income history.

Hope that helps?

[Jerry Rxman Griffin aka MuthaF'er]

Then there is the question of the employer having to pay HIS share of Medicare and Social Security taxes on 'income' if they report tips as income. ~10%. His share is equivalent to the employee's share so it's double what the employee pays. Can't say how tip income is considered. I have to do my own payroll today or tomorrow and I will have to pay my 941 taxes as a non-service business. I also have to pay my employee's (me) withholding taxes included along with the company SS and Medicare and the employee's SS and Medicare, another ~10%. Then there is Fed and state unemployment taxation on the employer based on the first $12K or so each year.

I'll be collecting my SS next year. It is based on income over time, not on non-reported income. 

 

[greenjeans]

It's been a while, but I worked at a bar after college for a while.   We had to fill out a slip every night for the tips we made - both cash and by credit card.   Of course the cash tips may not have been accurate 
All of our taxes were taken out of our check for hourly wages that we got every two weeks; Federal, FICA, Social Security.   We were allowed to walk with our tips each night (cash and credit card), as a courtesy I guess.   Most times our paychecks were very small as all of our taxes were taken out by our employer.  And this was a hole in the wall dive bar at best.  We're not trying to get him out of paying his taxes, he's just bummed and shocked that he will have to pay a pretty good lump sum.   I've since found out that my nephew and his co-workers have not filled out any such tip sheets or reports.   I'm shaking the tree over there a bit as their first explanation was:  He claimed "4" on his W-4.   He's single with no kids.   They sent him a scan of his W-4 to prove their claim.  A couple of weird things that I noticed from it:   it has 2 different colors of ink on it and, it is dated 4 months after he started...     Still working on it, but something to me seems a bit shady over there.  It's a pretty good spot for him, so he wants to stay.   He makes really good money working only 3 nights per week.   So, in the mean time, I'm having him and his co-worker help/watch the counting of the money at the end of the night and recording his amounts each night for himself.

[Duke McDukiedook]

That's why I tip in cash when I can. I'll let them decide what to report and not leave it up to sticky fingers Uncle Sam. 

[greenjeans]

Amen.  That's the only reason I carry cash.

[trenchgrinder750]

credit card tips plus hourly rate(nyc its now $7.50 an hour for tipped employees) are reported and should be taxed accordingly.  cash tips even in a pooled house should be taken home that night or the next day.  also, see what your nephew is claiming on his taxes.

[CBGhia]

Your nephew may have claimed a high number on his W-4 when he got the job. They would pay the normal amount to SSI and FICA but they didn't deduct much for federal.    Depending on his total income, he may not actually owe anything in taxes, anyway. 

[greenjeans]

he claimed 0.  clerical error somewhere.  They are working on it, or so they say

[Retro Rocket]

I can't believe you have to pay tax on tips.... , even worse, FOUR DOLLARS AN HOUR....you've got to be kidding.... Thats plain sad....

[Duke McDukiedook]

'MURICUH.

[Gene]

Taxes are due on tips - found out the hard way.  The employer is under no obligation to withhold taxes on those tips.

Those changes came into effect around the late 1980's.  Used to be if it was a cash tip - no worries.  But, these days - even of the restaurant/bar doesn't report tips, a percentage of sales (which is reported) is calculated by the IRS (used to be 8%, don't know now) and the tipped employee is responsible for that to be reported as income, ergo taxable.  This is one way that the service industry gets around having to pay minimum wage to service workers.

EDIT* - shoulda read the whole thing.  What Cal said.

[calj737]

he claimed 0.  clerical error somewhere.  They are working on it, or so they say

He should claim "4" (at least 2) as this increases his weekly NET PAY. At the end of the year when he files, likely he is in such a low income bracket that he will power $0 in taxes anyway. Be sure to deduct his attire and gadgets as business expenses to offset his "income". 

[Gene]

he claimed 0.  clerical error somewhere.  They are working on it, or so they say

Be sure to deduct his attire and gadgets as business expenses to offset his "income". 

But - make sure these are deductible first. There are often changes in the code from year to year.

[calj737]

But - make sure these are deductible first. There are often changes in the code from year to year.

Don't get wrapped around a Tax Code axle, Gene... We are trying to help the kid out 

[Gene]

Sorry - can't help myself - it's that time of year. 

Deduct everything you can - and for what it's worth, yeah, that stinks. But, keep in mind it's better to have to pay the gov't at the end of the year than get a refund . . . at least that money was under your control for the year.

[trenchgrinder750]

I can't believe you have to pay tax on tips.... , even worse, FOUR DOLLARS AN HOUR....you've got to be kidding.... Thats plain sad....

depending on the volume of the restaurant, a server and/or bartender can make $20-$50 an hour in tips.  But cash tips should never be claimed or taxed. 

[calj737]

But cash tips should never be claimed or taxed.

That's an odd premise? Why shouldn't income be taxed or claimed? To follow your logic, if I pay cash for all my expense, then the Payee never reports the income? Its called tax evasion. Thats why we have such national debt issues.

A Server is very unlikely to earn sufficient income, even reporting their total cash/tips/wages to warrant a income bracket that would necessitate a payment. Especially, if this is a "part time" gig.

[trenchgrinder750]

But cash tips should never be claimed or taxed.

That's an odd premise? Why shouldn't income be taxed or claimed? To follow your logic, if I pay cash for all my expense, then the Payee never reports the income? Its called tax evasion. Thats why we have such national debt issues.

A Server is very unlikely to earn sufficient income, even reporting their total cash/tips/wages to warrant a income bracket that would necessitate a payment. Especially, if this is a "part time" gig.

Sorry, let me rephrase. cash tips should not be claimed by the employer.  It is on the individual when he/she does their taxes quarterly/annually. I think the national debt issues go far beyond service industry not claiming cash tips.   But I'm going to leave it at that.

[Duanob]

Always amazed at some of the questions asked on this board. Frankly if you want to know about vintage motorcycles you came to the right place. If you want to know about the 2015 tax code, I am positive there are better places to get a correct answer. 

[Gene]

www.irs.gov

But - wouldn't you ask your friends first?

[calj737]

Sorry, let me rephrase. cash tips should not be claimed by the employer.  It is on the individual when he/she does their taxes quarterly/annually.

Actually, it is also incumbent (the law) on the Employer in Hospitality industries to report Tips earned as a % of Sales. This has been in place for a very long while and it addressed the issue of under-reported income. But the responsibility to "true-up" still falls to the individual.