[thechat] 18% tip not legally required

deacon web at master.gen.in.us
Tue Dec 28 22:05:59 CST 2004

On 28 Dec 2004 at 15:59, chris hardy wrote:

> A few years ago, tax law changed to require waiters/waitresses to report
> tips as untaxed income. There was a convoluted reporting process requiring
> them to keep a daily diary of tips. 

No more convoluted than any other income tax record keeping. You 
aren't necessarily required to keep a "daily diary", but you ARE 
required to keep accurate contemporaneous records. 

> The alternative to the daily diary was that employers could allocate a
> percentage of all sales as tip income. What happened to a number of folks I
> knew was that their employer allocated a higher percentage as unearned tip
> income than what they actually received. 

There's no alternative to keeping accurate contemporaneous records. 
You MUST by law report tips to your employer by the 10th of the 
month if you received $20 in the prior month. And it's not just 
waitresses, either. Bell hops, taxi drivers, hair dressers, card dealers, 
hookers - anyone who receives gratuities as an employee rather than 
as a self-employed person. 
> My understanding is that's still a problem, but not enough of one for people
> to fight it. People are usually well tipped in good restaurants and they
> usually try to get a different job if they're working in a restaurant that
> is bad enough to be undertipped.

There's no fight involved. The employer reports allocated tips on the 
W-2. Your accurate contemporaneous records say different? Not a 
problem. You report the correct numbers on your 1040. Sometimes 
employers get the W-2 wrong, too. In that case, the taxpayer reports 
the correct numbers, too. In either case, you need to attach a note to 
your return saying that it's not a typo, that your 1040 reflects the 
correct numbers, or the IRS computers will assume that it *is* a typo 
and automatically amend your return for you. (In most cases, the auto 
correction of typos is a benefit, not a hassle.)

If the employer does not take social security and medicare out of the 
paycheck to cover tip income, it's a *really* big bite at the end of the 
year, because you not only have to cough up the taxes, but also a 
penalty. The IRS figures that taxes are pay-as-you-go, and the 1040 is 
just an annual check to make sure you haven't been overpaying or 

Tax tip: if you should have been paying estimated taxes all year long 
and haven't been paying enough, ask your employer (or your wife's) to 
withhold 100% of your last paycheck of the year. It'll be considered to 
have been paid in equal installments throughout the year. (If you make 
a big estimated tax payment at the end of the year, it does NOT make 
up for shortfalls earlier in the year.)  A lot of businesses pay active 
partners a big Christmas bonus which is 100% withheld, to save them 
from having to make estimated payments months earlier. 


Lots of space. 
Lots of bandwidth. 
Lots of speed. 
Lots of reliability. 
Lots of support. 
Lots of preinstalled scripts.
Not a lot of money.

More information about the thechat mailing list