112th Congress: 2011-2012, Sponsored March 16th, 2011

To amend the Internal Revenue Code of 1986 to provide that tips shall not be subject to income or employment taxes.

Dr. Ron Paul has been a proponent of tax free tips for a long time.

Paul introduced the Tax Free Tips Act of 2011 in March. The measure would end all income tax, Social Security withholding and other federal levees on any tips earned by salaried workers.

Paul said in 2009, when he introduced a similar bill (H.R. 3664) “Unlike regular wages, a service-sector employee usually has no guarantee of, or legal right to, a tip”.

“Instead, the amount of a tip usually depends on how well an employee satisfies a client. Since the amount of taxes one pays increases along with the size of tip, taxing tips punishes workers for doing a superior job.”

From CampaignForLiberty.org:
“America’s hardworking waiters and waitresses deserve this most basic protection of their wages. Often times they are paid low hourly wages and expected to earn the rest of their income from tips. The problem is that tips aren’t always a guaranteed, steady income and depending on various factors can fluctuate wildly. The IRS makes an estimate of how much service-sector workers will make in tips, and taxes them on it even if the taxpayer did not actually earn as much as the IRS’ estimate!

Many waiters are simply young people trying to put themselves through school or single parents working multiple jobs to try and pay their bills while raising a family. Taxing their hard-earned tips is a disservice to service-sector workers across the country.”

A gratuity should be just that. A gift for a job well done. There is no reason that the government needs to be a part of that thankful exchange. Tip20! Supports Ron Paul.

Related to: http://www.tip20.com/tax-free-tips-act/18

Full text of the bill:

H.R.1139 — Tax Free Tips Act of 2011 (Introduced in House – IH)

HR 1139 IH

112th CONGRESS

1st Session

H. R. 1139

To amend the Internal Revenue Code of 1986 to provide that tips shall not be subject to income or employment taxes.

IN THE HOUSE OF REPRESENTATIVES

March 16, 2011

Mr. PAUL introduced the following bill; which was referred to the Committee on Ways and Means

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A BILL

To amend the Internal Revenue Code of 1986 to provide that tips shall not be subject to income or employment taxes.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

(a) Short Title- This Act may be cited as the `Tax Free Tips Act of 2011′.

(b) Amendment of 1986 Code- Except as otherwise expressly provided, whenever in this Act an amendment or repeal is expressed in terms of an amendment to, or repeal of, a section or other provision, the reference shall be considered to be made to a section or other provision of the Internal Revenue Code of 1986.

SEC. 2. TIPS NOT SUBJECT TO INCOME OR EMPLOYMENT TAXES.

(a) In General- Section 102 (relating to gifts and inheritances) is amended by adding at the end the following new subsection:

`(d) Tips- For purposes of subsection (a), tips shall be treated as property transferred by gift.’.

(b) Exclusion From Social Security Taxes-

(1) SOCIAL SECURITY TAXES-

(A) Paragraph (12) of section 3121(a) is amended to read as follows:

`(12) tips;’.

(B) Section 3121 is amended by striking subsection (q) (relating to tips included for both employee and employer taxes).

(C) Subsection (a) of section 3102 is amended by striking `; and an employer who is furnished by an employee a written statement of tips (received in a calendar month) pursuant to section 6053(a) to which paragraph (12)(B) of section 3121(a) is applicable may deduct an amount equivalent to such tax with respect to such tips from any wages of the employee (exclusive of tips) under his control, even though at the time such statement is furnished the total amount of the tips included in statements furnished to the employer as having been received by the employee in such calendar month in the course of his employment by such employer is less than $20′.

(D) Section 3102 is amended by striking subsection (c) (relating to special rule for tips).

(E) Subsection (a) of section 3202 is amended by striking the second sentence.

(2) TIER 1 RAILROAD RETIREMENT-

(A) Section 3202 is amended by striking subsection (c).

(B) Paragraph (3) of section 3231(e) is amended to read as follows:

`(3) Solely for purposes of the taxes imposed by section 3201 and other provisions of this chapter insofar as they relate to such taxes, the term `compensation’ shall not include tips.’.

(C) Section 3231 is amended by striking subsection (h).

(c) Exclusion From Unemployment Compensation Taxes- Subsection (s) of section 3306 is amended to read as follows:

`(s) Tips Not Treated as Wages- For purposes of this chapter, the term `wages’ shall not include tips.’.

(d) Exclusion From Wage Withholding-

(1) Paragraph (16) of section 3401(a) is amended to read as follows:

`(16) tips;’.

(2) Section 3401 is amended by striking subsection (f).

(3) Section 3402 is amended by striking subsection (k).

(e) Tips Defined- Subsection (a) of section 7701 (relating to definitions) is amended by adding at the end the following new paragraph:

`(51) TIPS- The term `tips’ includes any gratuity provided to a salaried employee by a customer or client of the employer’s business.’.

(f) Conforming Amendments-

(1) Clause (i) of section 32(c)(2)(A) (defining earned income) is amended by striking `tips,’.

(2)(A) Section 45B (relating to credit for portion of employer social security taxes paid with respect to employee cash tips) is hereby repealed.

(B) The table of sections for subpart D of part IV of subchapter A of chapter 1 is amended by striking the item relating to section 45B.

(C) Subsection (b) of section 38 is amended by striking paragraph (11) and by redesignating the succeeding paragraphs accordingly.

(D) Subsection (c) of section 196 is amended by striking paragraph (8) and by redesignating the succeeding paragraphs accordingly.

(E) Subsection (m) of section 6501 is amended by striking `45B,’.

(3) Section 220(b)(4)(A) is amended by striking `tips,’.

(4) Section 451 is amended by striking subsection (c).

(5) Section 6001 is amended by striking the last sentence.

(6) Section 6041 is amended by striking subsection (e).

(7) Subsection (c) of section 6041A is amended by striking `, 6052, or 6053′ and inserting `or 6052′.

(8) Subsection (a) of section 6051 is amended by striking `In the case of tips received by an employee in the course of his employment, the amounts required to be shown by paragraphs (3) and (5) shall include only such tips as are included in statements furnished to the employer pursuant to section 6053(a).’.

(9) Section 6053 (relating to tip reporting) is hereby repealed.

(10) The table of sections for subpart C of part III of subchapter A of chapter 61 is amended by striking the item relating to section 6053.

(11) Section 6652 is amended by striking subsection (b) (relating to failure to report tips).

(12) Section 6674 (relating to fraudulent statement or failure to furnish statement to employee) is amended by striking `or 6053(b)’ each place it appears.

(13) Subparagraph (B) of section 6724(d)(1) is amended by striking clause (xvi) and redesignating the succeeding clauses accordingly.

(14) Paragraph (2) of section 6724(d) is amended by striking subparagraph (X) and redesignating the succeeding subparagraphs accordingly.

(g) Effective Date- The amendments made by this section shall apply to tips received in calendar months beginning after the date of the enactment of this Act.

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Sources: thomas.gov, CampaignForLiberty, New York Post

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.

By John Dimsdale – Reposted from PublicRadio.org

The IRS figures the food and beverage business should be sending in some 200,000 tip disclosure forms every year. But only about a quarter ever show up. The IRS wouldn’t go on the record, but said it recently hired an outside contractor to identify slackers and that it’s conducting more audits.
Here’s the way it’s supposed to work: Servers and valets are supposed to report their tips to the boss. The boss reports that cash as employee income. Both the establishment and employees pay taxes on it. But Patrick, a former parking valet in Nashville, who didn’t want his last name used, says it didn’t worked that way in his experience.
“It was more of a “don’t ask, don’t tell” policy with ignorance being bliss on both sides,” said Patrick.
He says restaurants aren’t anxious to pay extra taxes, and neither are workers. The National Restaurant Association wouldn’t grant us an interview about IRS compliance, but says it is working to improve tip reporting. A narrow sample of food service workers finds most decide not to report about half their cash gratuities. We granted them anonymity so they would speak freely.
Erik, a former bartender and waiter here in Washington, says he started out reporting all his tips.
“Originally, I was declaring 100 percent until an older server told me I was essentially being a moron,” said Erik. “She told me, you never declare all your tips, especially not all of your cash tips.”
Tips on credit cards have a paper trail so they have to be reported, but not cash tips. Restaurants say they do advise employees to report all tips — and Jessica, a former waitress from Upper St. Clair, Penn., says hers did.
“In the break room of the restaurant where I worked, they had an entire wall of posters and a lot of them had to do with reporting your tips and what happens when you don’t report your tips correctly,” she said. “There were newspaper clippings of people who got investigated by the IRS.”
Still, cash transactions have long been an opportunity for tax evasion. Sheldon Cohen started the national tip compliance program when he was IRS commissioner 50 years ago.
“Waiters are not less honest than other people,” said Cohen. “They have more opportunity than other people. We discovered it basically doesn’t go necessarily with the occupation, it goes with the opportunity.”
For example, Cohen says, back when he was commissioner, doctors were frequent tax scofflaws.
“Forty-five or 50 years ago doctors received most of their payments in small amounts,” he said. “Doctors’ visit was $5 or $10 and people left cash most of the time.”
It wasn’t long before insurance companies and credit cards put an end to cash changing hands, so doctors had a harder time hiding income. But restaurant servers and bartenders still get an average 40 percent of their tips in cash.
Chris Bergin, publisher of Tax Analysts, says the IRS is under the gun to capture more of that lost revenue.
“We’re running huge deficits. We’ve got an enormous debt,” said Bergin. “The IRS is under political pressure to close what’s called the “tax gap” and go after people who are not paying their taxes.”
But as long as tips are cash, and essentially a private transaction, there may be only so much the IRS can do.

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.)

Why should you tip? It is amazing how often this question is asked and debated. To me the answer is painfully obvious. When someone asks me why people should tip, I answer their question with a few of my own. Do you want hot food? Do you want your drink refilled? Do you want the person taking your order to care about the quality of food you are going to eat? The answer to these questions is always yes. So why would a person that is getting paid hourly whether you eat there or not care about any of those things if there is nothing extra in it for them? The acronym T.I.P.S. has been said to stand for: Tipping Insures Prompt (or Proper) Service. The argument above is usually very hard to argue against because there is no doubt that servers give good service based on what they perceive to be a carrot on the end of a stick. They will work hard for you and you will reward them at the end for a job well done. So to me, the question is not really to tip or not, but rather how much to tip.

Tipping standards vary greatly from region to region and country to country. To complicate matters, tipping standards change over time and what services require a tip also change. Back in high school I had a friend who believed that tipping on drinks was not necessary. I never did figure out his logic on that one but it does go to show that there are many ideas about tipping.

When figuring your tip, you should consider the following circumstances that may or may not apply to the server depending on which state you are in.

* Hourly wages are typically significantly less in the service industry, because tips are considered part of the servers income.

* Your server does pay income taxes. In absence of proper documentation of tips, the government will look at the servers food and beverage sales and base their taxable tip income on a percent of it. So if you do not tip the server, it has actually cost the server money to serve you. See the IRS tipping tax laws.

* Believe it or not, servers do not always get a paycheck. Sometimes, because of the taxes they pay and/or deductions, servers must pay in additional money to cover the taxes rather than get a check.

* Your server has to tip too. It is very common for a waiter or waitress to have to tip out their supporting staff, ie; the bartender, buss person, food runners and others. Bartenders may have to tip out their bar backs. These tips are based often on the sales of the server, so if you don’t tip them, in addition to the 8% the government gets they often have to shell out money to the support staff putting them further in the hole. Sometimes the support staff is tipped a percent of the servers tips. So not tipping the server is the same as not tipping any of the hard working support staff in the restaurant.

* Servers do a lot of work that they are not tipped on also. It is called side work and it is work that is done for no more than their hourly rate. Side work usually involves cleaning the restaurant, stocking supplies and getting the store ready for the next shifts business. Side work can be time consuming and at times physically straining.

The most common argument (and frankly the most annoying and ignorant) against tipping is that by not tipping you are “helping” the servers cause for better hourly rates. For starters, hurting one server here and there on any given day is not going to further any cause. Second there is no cause. Most servers do not rely on their hourly income. Serving is hard, fast paced work. Servers can earn a good living from the tips they get. If servers were going to work for a strictly hourly rate, I can assure you that rate would be high. If the hourly rate were high, guess what would happen to the prices you pay when you go out to eat or drink? That money would have to come from somewhere.

Do you legally have to tip? No. Occasionally, you will have a situation where gratuity has been automatically added to your bill. This is usually on larger groups or parties. This gratuity has been added because it is easy for the server to get a tip that is far less than they deserve, because in a group setting it is easy for one or two people to under pay causing the rest of the group to fall short. Again, you do not legally have to pay this gratuity, but if you don’t you should have a talk with the server and/or manager and explain why. Remember, just because a gratuity has been added, it may still be less than a good tip for the server. For example, a gratuity may have been added at 15%. This is a tip for average service. If your server did a great job it is good to add in the difference to make up to 20% or more. Many times the server had to give up several other smaller tables to take your party, so even with automatic gratuity they end up making less on their shift.

After all that, why do servers do it? Well in the end, there are enough people out there that understand that a good tip is a kind reward for a job well done. And waiting tables can be quite profitable. It is no surprise that the most financially successful servers are typically the most friendly, efficient and entertaining. These servers are rewarded for exhibiting those behaviors. And we all want to encourage those behaviors. Don’t we?

Revised 11/2/2009

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