So, here’s an overview of what you need to know about taxes from the tipped employee perspective about tips, with a special focus on Albuquerque, which is where we are. As a tipped employee, you do need to pay taxes on your pay from your employer and on your tips.
Taxes stink, but that’s true for everyone, not just tipped employees. However, there are a few more things for tipped employees than normal salaried or hourly employees, the most important thing of which is tip reporting.
So, the vast majority of tipped employees should have some sort of employer based system for reporting your tips. Hopefully your employer has some sort of electronic tip diary, where you enter your tips for the day at the end of your shift or the next day. If they don’t, please ask them to join the freaking 21st century, because it makes it a lot easier for everyone involved.
Let’s just say that you don’t have an electronic tip system. Here are the painful tip reporting requirements: As per the IRS, you need to have a tip diary or save documentation that shows your tip amounts. Those records need to be at least daily, but you need to provide a monthly summary to your employer by the 10th day of the following month. That summary need to include your name, address, social security number, time period, date submitted, your employer, cash tips, credit/debit tips, tips paid out to other employees, and net tips received. And then you have to sign it.
Okay, so, hopefully you can ignore that last paragraph because your employer does use an electronic tip reporting system, and that means that they should also be withholding the correct amount on your payroll taxes. In some places, if you get enough tips and the tipped minimum wage is low enough, you may actually owe more in taxes than your paycheck and you might need to actually owe your employer additional tax withholding money. Generally, that shouldn’t be an issue in Albuquerque, because the tipped minimum wage here is $5.30 per hour, which is more than double the federal tipped minimum wage of $2.13.
Other Tipped Wage Stuff
- Shared Tips: Make sure that you only report the tips that you actually end up with. If you have a tip pool or share tips, you only declare the tips that you actually keep for yourself. If a guest tips you $10 and you tip out the bartender and busboy $4 at the end of your shift, you should only be reporting $6.
- Service Charges: These may seem like tips, especially when you most commonly see them for parties of six or more in restaurants, but they’re not actually tips. Technically they’re income for your employer, even if they’re entirely paid out to you. As far as we understand them, it shouldn’t really affect the way they work for most tipped employees, but it does make a difference to your employer.
- The Penalty: So if you don’t report your tips and the IRS catches you out on that, then you may have to pay a penalty of 50% of your unpaid taxes. And yes, that’s in addition to the taxes you owe, so it’s a total of 150% of what you would have owed if you’d just paid your taxes in the first place. (This is per US Code Title 26 Section 6652.)
Why You Should Declare Tips
So there are two big reasons that you should declare your tips to your place of employment, which means that yes, you’ll be paying taxes on them.
First is that the IRS will totally notice if you’re working as a tipped employee and not declaring any tips and they’ll audit you, and yeah, that sucks just as much as it sounds. They might not notice if they’re not exactly correct (and just to note, we absolutely never endorse any false declarations to the IRS ever) but if the number is zero, that’s a big easy red flag for them.
Second, those tips really are part of your income, and if you’re ever looking for financing for a car or a house, the bank will likely rely on your tax returns to determine what your annual income is. If you aren’t reporting tips it’ll look a lot lower to them and they may doubt your creditworthiness. Or they’ll just loan you less money.
There’s a third reason too, although it doesn’t appeal to people’s sense of self-interest but rather to their honor: paying taxes is good for society. Do your part to be a better citizen, and yeah, that means paying your taxes.