Below is the info from IRS (
https://www.irs.gov/businesses/small...urant-tax-tips)
In summary, servers pay tax on their tips, no more, no less, whether they are in cash or from credit card charges. Obviously, if you're a server and you tip out $10, you deduct that from your gross tips.
The restaurant has to report at least 8% of sales as tips, unless they fill out a form and then it's at least 2%. If you are a server and you are not making 2% of sales, then you should find another line of work. (And even if you NEVER receive a tip, god help us all, you still pay tax on zero tips.)
IRS info:
Tips your employees receive from customers are generally subject to withholding. Employees are required to claim all tip income received. This includes tips you paid over to the employee for charge customers and tips the employee received directly from customers.
Employee Requirements
Employees must report tip income on Form 4070, Employee's Report of Tips to Employer (PDF), or on a similar statement. This report is due on the 10th day of the month after the month the tips are received. This statement must be signed by the employee and must show the following:
- The employee's name, address, and SSN.
- Your name and address.
- The month or period the report covers.
- The total tips received.
No report is required from an employee for months when tips are less than $20.
Both Forms 4070 and 4070-A, Employee's Daily Record of Tips (PDF), are included in Publication 1244, Employee's Daily Record of Tips and Report to Employer (PDF).
Employer Requirements
Employers must collect income tax, employee social security tax and employee Medicare tax on tips reported by employees. You can collect these taxes from an employee's wages or from other funds he or she makes available.
Allocation of Tips
As an employer, you must ensure that the total tip income reported to you during any pay period is, at a minimum, equal to 8% of your total receipts for that period.
In calculating 8% of total receipts, you do not include nonallocable receipts. Nonallocable receipts are defined as receipts for carry out sales and receipts with a service charge added of 10% or more.
When the total reported to you is less than 8%, you must allocate the difference between the actual tip income reported and 8% of gross receipts. There are three methods for allocating tip income:
- Gross Receipt Method
- Hours Worked Method
- Good Faith Agreement
Employers can request a lower rate (but not lower than 2%) for tip allocation purposes by submitting an application to the IRS. Detailed instructions for computing allocation of tips, reporting allocated tips to employees, and for requesting a lower rate can be found in the Instructions for Form 8027 (PDF).
Note: The amount shown as allocated tip income is for information purposes only. You are not required to withhold Income or Social Security taxes on the allocated tip income. The amount of tip income allocated to each employee is shown in box 8 of their Form W-2.
Originally Posted by
CJKatl
In many restaurants, at the end of the shift the waiter is told, "You sold X, tonight's tip out is for four employees so it's 25% so you owe Y." Nowadays that's often just taken out of the cc tips if those are paid out weekly or biweekly. Leaving it up to the individual server to decide based on self reporting tips leaves too many open questions for those receiving the tip out. While I worked with many honest people, there were some who would have likely shortchanged the tipped out employee. Basing tip out on sales gets rid of that and, again, allows for accurate reporting to the IRS. Sometimes when a back waiter or bus boy goes above and beyond and the waiter will tip out more. That would be given directly to the employee, but the minimum tip out is usually based on sales, not self reporting or totaling of tips received.
So yes, the waiter pays tax and tip out from his own funds if you leave nothing. I've done it once that I can remember when the service was horrible and I had chewed out the waitress when chimed in, "but the service was good, right?" Otherwise, when I'm pissed with the service, which has only been a couple other times in 30+ years, I leave 8%. The sweet spot is over 15% in cash which means the waiter walks with the extra money in pocket. For non-business, my standard is 20% +$1 all tipped in cash. For biz it's on my Amex.
A couple additional things: In the example above I oversimplified. The amount the waiter is taxes should be after the tip out amount is taken away. Tipped out employees pay tax on that. But it does't include the cc charge pass through. If the restaurant pays 1.5% to accept a certain cc, that amount will be deducted from any tips on that card so it doesn't cost the restaurant money. The restaurant pays its share on the food sales, but not on the tip in many restaurants.