Originally Posted by the_traveler

I was an IRS tax auditor for 7 years. (Please don't hold that against me!)

Yes, it is true that all charged tips are reported on the employee's W-2. But the IRS also has a formula of "what the average waiter/waitress should receive in tips". (The amount that is "average" is different at "Bob's Diner" in Kansas than it is at a 5-star restraurant in NYC.)

If the employee does not report tips that is "near the average amount", it can be questioned. If it is near that "average amount", it probably will not be questioned.

It is up to the employee to report any difference on his/her tax return. But if there is an acceptable reason for the discrepency, the auditor may accept it.

Examples:

1) The "average amount of tips" that are received by a waitress at "Bob's Diner" is $2.00/hour. The W-2 shows about $1.50/hour in tips. She "should" report the other $0.50/hour tips on her return.

2) The W-2 shows $3.50/hour in tips. The waitress need not report any more, but they sometimes do.

3) The "average" at a 5-star NY restaurant may be $25.00/hour. The W-2 shows $15.00/hour. The waiter "should" report the other $10.00/hour tips.

4) The W-2 shows $30.00/hour. The waiter does not need to report more.

A possible acceptable explanation for a difference is that the restraurant burned down or got flooded, was closed for 5 months, but the owner paid the waitress for those 5 months.

The "average" % reported on the W-2 is usually 8-10% of sales. "Most" diners usually tip 10-20%, some more and some less.

It is up to the server to report a "reasonable amount" of tips - but is must be a believeable amount! I have done an audit where the server would not budge to her claim that her tips amounted to $0.03/hour for the whole year! How many people have left 1 penny for a tip? I am sure that she served more than 10 people during the year.

I am NOT "for the IRS", but I'm all for everyone paying their share. After all, if "you" do not pay your share, then "I" have to pay my share AND your share too!

Yes, you can pay the server your tip in cash. But you will lose the miles/points that would have been earned. And (s)he will still have to report the same amount - if they are honest! (And believe it or not - I think most people are honest!)