Servers & Bartenders Pay Tax on Tips
I want to start this story off by saying that I am an extremely good tipper. Why? Because I starting working as a busboy at restaurants back in the 80s, eventually becoming a food server and bartender. I didn’t want to age myself in this story, but now the cat is out of the bag. I survived on tips for a solid decade and I was very happy to have the cash on hand to buy what I needed to live. We were only paid the minimum wage and the hours were limited, so we really looked forward to busy lunches and dinners to make some cash. Some days were bad for us, as it would only take a few bad tips to ruin our day and leave us with very few dollars in our pockets. The funny thing was that my fellow co-workers and I were ready to go ballistic when we were “stiffed” (not tipped). Back then, we expected at least 15% of the pre-tax amount of the check to have any level of satisfaction. You see, we paid taxes on the revenue we produced through our food & beverage sales. Most people don’t know this, but the IRS mandates that Food Servers and Bartenders claim at least 8% of their receipt sales as tips received. So when a customer stiffed us, we knew that we would be paying tax on tips we never received. This is still very true today and now that restaurants operate sophisticated POS systems, there are better mechanisms to input claimed tips. Below, I have included what the IRS requires the employers to enforce.
IRS Requirements (Source: irs.gov) 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 non-allocable receipts. Non-allocable 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 here.
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.
General Guidelines for Tipping in the USA
Waiters usually rely on tips in order to stay above the minimum wage, so a 15-20% tip is standard. Paying 25% would indicate that you received great service, but even if you weren’t particularly happy, a 10% tip is still expected. If you don’t tip at all, you risk being followed out of the restaurant by an unhappy waiter wanting to know what they did wrong! Tips are factored into workers’ wages.
- Restaurant: 15-20%.
- Bar: $1 for every drink. 15% -20% on large checks
- Room Service: Service charge included, additional tip is optional
Wait-Staff Today Need Tips Even More Than You Think
As much as some people would love to replace tipping with a more sensible system—like, you know, just paying workers more money—today’s waiters and waitresses remain stuck desperately in need of gratuities. The Wall Street Journal recently reported that nearly 15% of America’s 2.4 million wait-staff live in poverty, compared to 7% of all workers.
Tipping Advice by Country (information provided by Mirror.co)
When traveling abroad it is always nerve-racking to know what is expected from country to country. The problem that I have when traveling abroad is that I am so programmed to tip that when I am in a country that doesn’t require it, I still feel uncomfortable not leaving a tip. I assume this is a problem for others Americans as well.
Austria
Restaurant: Service charge is normally included in the bill and the custom is to round up – which may turn out to be around 10%. If a meal comes to, say, 37 round it up to 40.
Australia and New Zealand
Workers in Australia and New Zealand are paid a decent wage to start with, and tipping is generally considered to be an unwelcome import. More touristy places will understand tipping customs, but would be unlikely to expect extra cash.
Croatia
Tipping is appreciated but it is not expected. Restaurant: Around 10% is the norm.
France
The French consider it flash to tip for no good reason. Restaurant: A 15% servis compris is added to bills, required by French law. But the waiter may never see this. If you’re happy with the service, add a tip with a few coins or round up the bill. Bar: It is not the custom to tip.
Greece
Tipping is optional. Restaurant: Service charges are added but its unlikely staff will see any of it. It’s polite to add a little extra for good service. Bar: Tipping is not customary among the locals.
Italy
Restaurant: Service charges are usually included but, if not, 10% is considered the norm. Bar: Italians often leave just some small change.
Spain
Restaurant: Bills always include service but an extra 5-10% on top in cash is seen as customary. Bar: 0.20 per drink, depending on the bar.
Turkey
Restaurant: 5-10% in inexpensive restaurants, 10-15% for luxury. Bar: 5-10%, but not expected.
South Africa
It is almost mandatory to tip in South Africa, although the amount is not particularly important – the tip indicates your gratitude for the service. 10-15% tipping would be usual in restaurants.
Egypt
Tips are highly appreciated here, and the locals generally prefer receiving US$ rather than Egyptian pounds. Even after tipping, you might hear disgruntled mutterings about a skimpy amount, but this is all part of the haggling culture. Don’t feel pressured to give more money, as a 10% tip will usually be sufficient.
India
Tipping is culturally important as part of baksheesh, where the wealthy are generous to those less well off. Don’t forget about your cabbie, hotel maid, or porter.
Japan
Tipping is definitely not big in Japan. The Japanese pride themselves on offering good service as a standard, and it is considered rude to leave a tip. Only tour guides are likely to accept tipping but although they will not be insulted, they certainly don’t expect it.
China
You are less likely to inadvertently offend if you tip in China, but you will probably find that your tip is refused. Tipping has historically been illegal, and still is in some regions. In rural areas you will at best confuse, and at worst panic the recipient! The exceptions are tour guides, who will expect a tip from each person. Tipping isn’t necessarily always cash – small gifts are sometimes given instead.
Singapore
Tips are discouraged in hotels and many tourist attractions. Even in restaurants, it would be controversial to tip. It is not customary for locals, but tourists are believed to have more money. Particularly good service could merit a 10% tip, but do not feel obliged.
A Final Tip (no pun intended)
The whole tipping concept is a controversial one. People argue about why to tip and why not to tip, how much to tip and when to stiff someone. The bottom line is that the tipping system is chaos and there is never going to be a case where all parties are content with the idea. I hope these guidelines give you a better perspective into tipping culture and you are able to make an informed decision when dining out.
Christopher Swanger is a technology veteran in the gaming industry and has worked both as a vendor and an operator. He is a Go-To-Market expert who helps companies establish relevance and value within the gaming and hospitality sector. As a proponent for innovation, Chris writes for Gaming & Leisure® Magazine to help tell the stories that his technology partners and colleagues deem important to the betterment of the gaming industry. More about Chris at http://www.ChristopherSwanger.com.