Are tips taxed for waiters?

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are tips taxed

The very short answer is “yes,” tips should be claimed as income and, in turn, be subject to taxation from the IRS. It’s no secret, though, that many individuals in the service industry choose not to claim their tips, or only do so for a portion, such as shared tips or those left on a credit card. 

According to the IRS, any server who makes more than $20 in tips in a given work month needs to claim them for tax purposes. That can sound difficult if you’re new to the process of tip claiming, but it’s surprisingly easy to stay on top of once you get the hang of it.

Plus, with help from technology, it is becoming even easier. This article will take a look at why you should claim your tips, as well as some literal tips on how to do so efficiently without enduring too many headaches. 

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Why claim your taxes as a waiter?

Though the IRS tends to have its sights set more on major fraud and tax evasion, it is still illegal for individuals in the foodservice industry to dodge the proverbial “man” and not claim their full income, which includes tips. In some states, there is a server minimum wage that is legally allowed to be lower than the regular minimum wage, given that tips are considered a legal part of a server’s income. 

Even if you have a problem with authority, though, claiming your tips can do more for you than just keep you right in the eyes of the IRS. Here are two key reasons why you should make it a habit to claim your tips. 

It’s the law

Though rare, the IRS does occasionally audit members of the service industry, especially those who are lifetime waitstaff or bar staff who live in a nice neighborhood of a booming and expensive city, yet claim only to bring home about $1,000 per month. Eventually someone is going to notice, and an audit is a possible route for the IRS to take. 

To properly claim your tips, you don’t actually have to have any contact with the IRS, as the IRS Form 4070, which will be discussed in the next paragraph, is to be given to your employer before the 10th of each month after a pay period. For example, if you collected $300 in tips in August, you should turn in your Form 4070 by September 10 with all tips included. 

Avoid audits with proper paperwork

There are two major forms from the IRS that will help you stay out of hot water relative to taxing your tips:

  • IRS Form 1040: This is the IRS’ deduction form, where you list your different forms of income for the year, both taxable (like tips) and non-taxable. It is recommended that you keep a monthly log of your claimed tips if your employer does not. There are some apps available, such as Tip$ee, that allow you to quickly and easily input your tip earnings after your shift so you can reference it at the end of the month or the year when you decide to file. 
  • IRS W-2 Form: The W-2 is what your employer gives you at the end of each year telling the government how much of your income was already taxed. If you do not claim your tips in-office, then this form will not reflect your tips and you can expect some hefty taxes on the amount you claim as income beyond what the business paid you. Oftentimes a company will only record credit card tips as income on a W-2, so make sure you don’t claim those tips twice, or you’ll be giving Uncle Sam extra money. 

Financial benefits of claiming tips

The not-so-secret reason that many people don’t claim all of their tips is simple: it may not get taxed and the server will have a few more pennies in their wallet. Saying it that way makes it seem a little more illegal than simply going through the motions of not claiming a tip, but with those paid taxes do come some benefits. The first is avoiding legal action from the IRS.

In addition to being legal, claiming tips also increases your legal income, which makes you more likely to get approved for things like mortgages and renting. There are benefits to making more money in the eyes of the law!

4 tip suggestions for waiters

Here are some good practices to consider in order to keep your tax-related workload manageable when it comes time to file with the IRS.

Create good habits

You don’t have to use one of the apps mentioned above, but finding a way to add “documenting your tips” to your end-of-shift duties gives you a legal paper trail if the IRS does ever come knocking, and also makes for quick and easy data entry when it comes time to fill out the 1040 and W-2 forms.

Track your gratuities

Much like credit card tips, additional payments for servers such as large-party gratuities or room service charges should already be counted by your company via the POS system that ultimately tracks hours/wages. Be sure to take note of your pay stub, and if these payments aren’t going to you, then it might be fair to ask your employer where they are going.

Remember credit card tips are tracked

It’s extra important to claim your credit card tips because they are part of a banking paper trail and very easy for the IRS to point to in the case of an audit. Cash tips are a lot harder to follow, but on-the-record: claim them too!

Claim your portion of shared tips

Another way to make sure you’re not paying too much to the IRS is to ensure you’re only claiming your portion of shared tips. For example, if you’re a bartender and in charge of “tipping out the staff,” you don’t need to claim every dollar in the tip jar as your own. If you make $500 in tips and give $100 to the kitchen and $100 to the bar back, you should only be claiming $300 as taxable income when documenting your evening. 

It’s a win-win!

Everyone knows you’re supposed to claim all of your tips, but a difficult last couple of years for the service industry has caused some understandable bad habits to form. As the new year kicks off, remember that it is, indeed, illegal to not claim your tips, and the IRS did, indeed, have a rough couple of years as well.

Getting on track with your tip claiming is easier than most make it out to be, and with apps galore, even easier for the tech-savvy servers out there. In addition to keeping you legal, claiming tips makes your income higher to lenders, so if you’re planning on buying that new car, or even house in the coming years, the more claimed income you have, the better chance you have at those loans. 

Legal and more appealing to lenders? Cheers to that!

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