We all realize that tipped employees hope to claim as little as possible in tips on their tax returns so that they pay as little as possible in taxes. Restaurant owners and managers want to see their staff members happy and able to keep as much of their hard-earned wages as they can.
But it’s important to know what the rules say. This guide will be important if you:
- Are new to the restaurant industry and need to know your employee rights
- Are a restaurant industry veteran who still needs clarification on rules or never had them fully explained to you
What Tipped Employees Need to Know
Tips
Tips are voluntary. Customers are not obligated to pay tips, even if it’s customary and expected. Fortunately, most customers are empathetic enough and follow the common courtesy of paying tips. To an extent, all servers are in control of how much or how little they will receive in tips. If a customer tips based on service excellence, you can expect to receive more for good service.
Wages
Employers can pay an hourly rate that’s lower than the minimum wage. It’s expected, however, that you will make up the difference plus some, in many cases, in tips. Unlike waiters, however, kitchen staff and others who do not interact with customers can be paid differently. They do not receive tips in some cases and must receive at least minimum wage.
Pooled Tips
Employers can require that you share tips with other coworkers who also work directly with customers. If a customer leaves a large tip, you will then be required to share tipped earnings with other servers and potentially with other types of employees. This practice of pooled tips is common throughout restaurants. If your boss or employer, however, sits in the backroom and rarely interacts with customers, it is illegal for your boss to take some of your tips. While rare, such a scenario should never occur.
Cash Tips
Cash tips are required by law to be reported as part of your taxable income. An employee who earns more than $20 in tips per month must report all of the tips received as taxable wages.
However, taxes and tips extend beyond employee obligations. Employers are also required to keep records of the tips that employees receive. Once you have reported how much in cash tips that you’ve received for the day, you can then keep the money.
It’s crucial that the amount of tips that you claim matches the amount that an employer has recorded. If you claim that you have received an amount in tips that is lower than your employer’s records indicate, you are going to run into some trouble.
Credit Card Tips
Tips that were paid using a credit card or debit card must be paid to you by your next paycheck. Or, an employer can pay out credit card tips as cash when your shift is over. That practice is up to them, as both options are permitted by law.
Regardless of how you receive your tips, your employer is permitted to deduct credit card processing fees from your tips. Typically, that means taking out 3 percent of your tips to cover card processing.
Your total tips, including cash and credit card tips, should be listed on your paystub during every payroll period. Remember, your employer can pay you an hourly rate that’s lower than the minimum wage because it’s expected that you will make at least minimum wage when including tips. The federal minimum wage is $7.25 per hour, although it’s higher in many states and jurisdictions. Restaurant employees who don’t receive tips must be paid at or above minimum wage.
Claiming Tips as Part of Earnings
The truth is, a lot of tipped restaurant employees do not claim their tips as part of earnings. Or tipped employees sometimes claim only enough to show that they’ve earned minimum wage. But there are several things to know about this approach.
For starters, doing so is risky. You are legally required to pay income taxes on all of your income, which includes tips. The IRS has the right to investigate and review sales receipts to determine if employees are reporting a reasonable amount of tips for tax purposes. If the IRS suspects that you are not claiming a sufficient amount in tips reflective of what you actually earned, both you and your employer could be audited. That would not be good.
By not claiming tips, you could be harming yourself in the long run. When you retire, you will be eligible to collect social security and Medicare benefits. However, your ability to collect these benefits, and the amount that you can collect, depends on how much you paid into these programs while you were working and on how much your employer contributed based on your reported earnings.
The less you claim as far as earnings, the less you will be able to collect from these benefits in the future. When it comes time to retire, you may not be able to retire, or to retire as comfortably if you’ve been shortchanging your benefit contributions along the way.
Your Payroll Provider
There are plenty of rules and regulations when it comes to wages, tips, and taxes. Your payroll processing provider should be able to answer any questions about payroll.
