Waiters and waitresses under report their tips by 84 percent, according to the Internal Revenue Service. The high prevalence of tax fraud in the service industry makes waitresses a big target for IRS auditing. Thus, reporting only the actual amount of tips received and adequate record-keeping can prevent penalties from the IRS.
The IRS does go after waitresses for cash tips, because the lack of tracking of tips in many businesses leads many workers in the industry to omit tips on their taxes. Just working as a waitress can increase a person's chance of audit. A special software program employed by the IRS gives taxpayers a score based on their custom formula called DIF (Discrimination Information Function). Although the DIF formula is secret, we know that it is based on statistics from other taxpayers. For example, a waitress that earns a base salary of $20,000, but reports just $100 in cash tips probably has unreported income because other workers with a similar income and job report more tips.
An audit can reveal unreported cash tips even without direct evidence of under-reporting. For example, the IRS can compare a waitress's lifestyle to her income. A low income but high amount of spending suggests unreported income. For example, a waitress that claims a gross income of $20,000 but buys a $25,000 luxury car probably has at least $5,000 in unaccounted income.
Unreported income due to negligence incurs a penalty of up to 20 percent, and cases of tax fraud allow the IRS to impose a penalty of up to 75 percent. The IRS does not have exact guidelines for what constitutes fraud and negligence but it usually levies a negligence penalty rather than pursue a criminal case. If you had a large amount of fraud, like $100,000 in unreported tips, the IRS may try to charge you with fraud. More than 75 percent of audited returns result in an additional tax obligation to the IRS, according to John Dobosz of "Forbes."
You do not need to report tips to your employer if you regularly receive less than $20 in tips each month, but you still have to report it as income on your return. Keep records of any tips you receive and those that you give out, such as distribution of tips as part of a tip-sharing agreement with other employees. The IRS assumes waiters and waitresses receive at least 8 percent of sales in tips, unless the worker can prove otherwise.
- Nolo: Negligence Versus Tax Fraud: How Can the IRS Tell the Difference?
- The Motley Fool; Top 5 Audit Myths; Roy Lewis; March 2006
- "Forbes"; Ten Tips For Surviving An IRS Audit; John Dobosz; August 2006
- Summit Accounting: Waiters and Waitresses Tax Deductions
- Jackson Hewitt: Waiters - Waitresses
- Internal Revenue Service. "Publication 1244: Employee’s Daily Record of Tips and Report to Employer," Pages 1-4. Accessed Feb. 14, 2020.
- Internal Revenue Service. "About Publication 1244, Employee's Daily Record of Tips and Report to Employer." Accessed Jan. 22, 2020.
- Internal Revenue Service. "Publication 531 (2019), Reporting Tip Income." Accessed Jan. 22, 2020.
- Internal Revenue Service. "Form 1040: U.S. Individual Income Tax Return," Page 1. Accessed Feb. 14, 2020.
- Internal Revenue Service. "About Form 4137, Social Security and Medicare Tax On Unreported Tip Income." Accessed Jan. 22, 2020.
- Internal Revenue Service. "Form 4070A," Pages 1-4. Accessed Jan. 28, 2020.
Russell Huebsch has written freelance articles covering a range of topics from basketball to politics in print and online publications. He graduated from Baylor University in 2009 with a Bachelor of Arts degree in political science.