Tips are taxable income
Sunday, February 03, 2013
Most of us will be watching the Super Bowl today from the comfort of our homes. Or at a friend's house.
But some folks will head out to a sports bar for the NFL championship game. If you're one of them, remember to tip your server.
Some people are opposed to tipping. But most food service workers make very low base wages and depend on tips to make ends meet. In fact, tips are the excuse reason restaurants usually give for paying waiters so little.
Personally, I think the low salaries for restaurant servers is despicable. They shouldn't have to depend on customers to cover their bosses' underpayments.
Plus, I've seen too many waiters deal with obnoxious patrons who often seem to make servers' lives hell just because they can. Then they use the service slights they intentionally helped create to justify leaving an embarrassingly small or no tip.
So the hubby and I tend to over tip. Again, that's our philosophy. Your dining out mileage may vary.
But one thing we don't like is automatic service charges added to meal bills.
I understand that a lot of folks tip too little or don't tip at all even when service is great. So these add-ons, usually 18 percent to 20 percent for large groups, would seem to take care of this.
Not necessarily.
In a recent automatic gratuity situation, a diner at a St. Louis, Mo., Applebee's deemed the 18 percent charge for her party-of-10 table's $34.93 check too much. She declined to pay the extra $6.93 and underscored her opposition to the forced tip by adding, "I Give God 10 percent Why do you get 18."
By now I'm sure you've heard all about the incident. The waitress who posted the cheapskate's reluctant tipper's act on Reddit was fired. The diner, a pastor, sort of apologized via The Smoking Gun.
Automatic tips and taxes: There also is, of course, a tax connection. This incident falls into a tip reporting category that the Internal Revenue Service tried to to clear up by issuing new tip rules.
But as is often the case when the tax man gets invovled, things just got messier.
Under an Internal Revenue Service tip ruling and subsequent guidance issued in June 2012 and which took effect this Jan. 1, automatic gratutities are not considered tips. They are wages.
And, as the law firm Fox Rothschild LLP notes,
"This policy presents a myriad of problems to operators in the hospitality industry, and in particular to companies that are in the business of hosting banquets, private or similar events because it has long been industry practice for these types of businesses to add a mandatory 'gratuity' or service charge to their banquet contracts or invoices."
I'll leave it to eateries and their tax and legal advisers to work out the tip/wage issues.
But today's Daily Tax Tip is for the meal servers and taxi drivers and hairdressers and manicurists and concierges and everyone else who gets tips as part of their jobs.
This covers the cash gratuities that an appreciative customer leaves on the table or slips into your palm, as well as non-cash tips.
And it means that in addition to providing services to clients, you also have another job: reporting the tip income.
IRS Publication 1244 provides record keeping material for tip recipients. IRS Publication 531 has more details on taxation of tips.
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