When figuring out taxes, there is a misconception that servers are required to report their tips as at least 8% of their sales revenue. 8% is simply a bottom line that the IRS uses when attempting to determine how much a server earned in tips over the year. The IRS does not expect to be paid 8% of a server’s sales as tax – that would be akin to taxing the customer for their bill. What it means is that in the absence of documentation to show how much that server earned in tips the IRS is going to assume that they earned at least 8% of their food and beverage sales. So if a server sells $1,000 of food than the IRS is going to automatically assume that they took home $80 in tips that night. They’re going to treat that $80 as taxable income and depending on what tax bracket the server is in they might get 25% of the $80 which is $20. So when a customer tips 8% it isn’t all going to the government, it’s simply that all of it is going to be taxable automatically.

To put it another way, if everyone tipped 8% the server would still make some money (albeit half of what is typical), it wouldn’t all go to the government. Most service employees average 15-20% of their sales in tips, so using 8% as a default is conservative from the IRS’s point of view. Servers are required to report ALL of their tips, even if they made 25% (or more) of their sales in tips. Naturally most of them will report far less than this, but still more than the default assumption of 8%. In places where credit cards are used the IRS can use the tips on charged receipts to estimate the amount of tips received from tickets paid in cash. The two are generally close to each other, so if a server shows 16% of tips on all of the charged receipts they’ll be sending up a red flag if they under declare their cash tips too drastically (e.g. 6%).

When servers are reporting income sales revenue through their income tax software, just keep in mind that 8% is just a guideline, not a hard fact of income and you are in-fact required to report all of your income. For all of the details of the law, see IRS Tipping Tax Laws

Still when a server is stiffed they are still losing money – they’re getting zero on a ticket that the IRS will assume they made at least 8% on, paying taxes on revenue they didn’t make.

How do I get that new car loan?

A Tip20! Original Article by J.D. Marshall, Tip20! contributor.

New employees to the restaurant industry always ask me how much of my tips should I claim and do I have to claim them all. The answer is very easy. “You must claim them all.”Now I know that many of you will not agree to that statement.  Many of us have the misconception that we only need to report 8% of our total sales as tips. The law states that you and I must report all (100%) tips we receive, except for the tips from any month that we do not total at least $20.00. The 8% allocation is a requirement placed on the employer. For more on this go to http://www.irs.gov/pub/irs-pdf/p531.pdf

Keep in mind that an IRS audit is no fun and you want to avoid the huge fees and penalties involved. Also you need to claim them in order to obtain Social Security and Medicare coverage. We can’t stay young forever.

Yes, I know we don’t get paid enough, the government taxes me enough already, I have rent to pay, C.D.s to buy and the list goes on and on. So really why should you or I want to claim all our tips?

Well let’s see. How many servers or any tipped employees do you know that cannot rent or purchase a home, have to walk, ride a bus or walk to work. Is it because they can’t afford the payments? Not in most cases. Most times it is because they don’t have any or enough credit. Without credit we are stuck, walking or living with friends or family.

One of the major things creditors look for is proof of income and the ability to repay. That’s right, if you can’t prove your income, chances are that you will be denied a credit card, the opportunity to get your own living accommodations or that new car you have been dreaming about.

Walking into a car dealership and bragging about how much money you make in tips at that nice new 5 star restaurant will only get you the cold shoulder and blisters on your heels having to walk home. But if you go into that dealership with your current paycheck stub or W4 showing all the mega bucks you earn (from the tips you reported) chances are you will be driving home in a nice shiny car.

Of course there is one drawback to reporting all your tips and owning that nice new car. Your fellow employees and friends will now expect you to be their taxi service.

Report all of your tips and I will be seeing you in the fast lane!

(J.D. is a long time veteran of the restaurant wars. He is always willing to share his wit and wisdom about the restaurant industry. You can find many of his thoughts and comments at Tip20.com. Have a question or comment for J.D.? Contact him at tiptopmanager@america.hm.)